It is important to understand what liabilities are because they are crucial part of normal business. The word liabilities always makes them seem like a bad thing and something we want to avoid, but that is not the case. Liabilities are just a normal part of business and they are not anything to be afraid of. Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.
A simpler way of thinking about liabilities is that they are a source of third-party funding that business uses to buy assets and fund operations. It should be noted that the other party might have the right to confiscate the assets from the business or make it sell assets to repay the debt a business is not paying otherwise.
Common Types of Liabilities
You can find them on one of the financial statements. Recorded on the balance sheet (the right side), liabilities are broken down into two categories which contain different liability accounts. Let’s review the examples of liability accounts a business might see in its accounting records.
- Current Liabilities
A current liability is a type of liability that is expected to be paid within a maximum one year. These liabilities are better known as short-term liabilities.
- Overdraft – when business effectively borrows of a bank by overdraw in its account, taking more money out of it than what is in the account, and must repay it to the bank;
- Accounts Payable – when a business buys inputs or products on account, which they need to pay back;
- Taxes Payable – for collection of sales taxes and employee deductions;
- Salaries Payable – any salaries the company owes to its workers and has not paid yet;
- Accrued Expenses – when a business or organization accounts for expenses that it will pay off at future dates;
- Customer Prepayments – money paid by customers to who the business owe services or products in return;
- Interest Payable – any interest on loans that have accrued since the last payment;
- Current Portion of Long-Term Debt – a portion of debt with an overall maturity of more than a year; portion due within 12 months.
- Fixed Liabilities
A fixed liability is a type of liability that goes over a longer term and the company has more than twelve months to pay it back. These debts are better known as non-current liabilities or long-term liabilities.
- Mortgage – a loan taken to finance new property or expand existing business premises;
- Equipment/Car Loan – these items usually cost a significant amount of money and the repayment is made over several years;
- Notes Payable – debt or equity securities held by the company;
- Deferred Tax Liabilities – when an income for an accounting period differs from the taxable amount on the business tax return;
- Pension Obligations – money that has to be accounted for in order to make future pension payments;
Other Long-Term Debt – the company’s borrowings with a maturity (full repayment) exceeding 12 months.
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Author: Charles Lutwidge