What are liabilities?
Liabilities encompass all current and future debts owed by your company. Loans, legal debts, and other obligations incurred through normal company activities fall under this category. For example, loans are frequently utilized to finance your business operations and pay for growth or new machinery.
On a balance sheet, liabilities are normally located on the right side. Most firms have obligations unless they take cash payments and pay in cash. Three primary categories of liabilities exist:
Examples of current obligations include the following:
- Bills payable
- Interest payable
- Payable income taxes
- Accounts payable
- Short-term loans for businesses
- Overdrawn accounts in banks
- accrued expenses
Three Different Types of Liabilities
Liabilities of various forms are taken into account in the company accounting formula.
- Current liabilities sometimes referred to as short-term liabilities, are obligations that must be settled within a year. For example, employee salary, mortgage and rent payments, rent or mortgage payments, credit card debt, short-term loans, and unpaid sales taxes are current obligations.
- Long-term liabilities, sometimes called noncurrent liabilities, are debts due in the upcoming year and beyond. Deferred tax liabilities, long-term interest charges, long-term loans, unpaid future bonds, pensions, and other long-term financial obligations are a few examples.
- Contingent liabilities: Some business owners and financial accounting experts also record contingent liabilities on their general ledger. These are obligations that might need to be paid in the future. These consist of refunds, fulfillment of product warranties, and lawsuit settlements.
3 Illustrations of Liabilities
Liabilities can be found anywhere in a company’s activities.
- Lender payments are a long-term liability- Because they offer short-term cash, business loans have a positive economic impact. However, these loans must be listed as long-term liabilities on a balance sheet.
- Taxes on annual income are current obligations- Income taxes are yearly. Therefore, they are, by definition, short-term liabilities.
- Unearned income may represent a burden- A short-term liability exists if a company’s income statement indicates a projected revenue deficit. Businesses plan for a specific amount of yearly cash flow, and if sales fall short of projections, they are recorded as a liability on the right side of the balance sheet.
Your liabilities fluctuate constantly. Penalties will increase if you have additional debt. On the other hand, liabilities for your company might be decreased by paying off your debts.
Liabilities often involve receiving bills from suppliers or organizations, which you then settle at a later time. As long as you haven’t paid the invoice, the money you owe is regarded as an obligation.
Liabilities could include loans. You can obtain loans to aid in the growth of your small business. As long as you haven’t given the bank or other person your borrowed funds, the loan is regarded as a liability.
Your company’s assets, liabilities, and equity are displayed on your balance sheet, which provides you with a quick overview of your financial situation.
Keep track of your debts on the right side of your balance sheet. Your balance sheet should start with short-term (current) obligations.
After your short-term liabilities, enter your noncurrent or long-term obligations. If you update your books, your report will portray your finances in a more accurate manner.