What are liabilities?

In simple terms, a liability is something you'll need to pay back. In technical language, liabilities represent the business’s obligations to transfer for an economic benefit (See FASB, Statement of Financial Accounting Concepts No. 8, Chapter 4, E37).

Types of liabilities

Liabilities are categorized into two main types based on when you need to pay them back.

• Current liabilities: These include debts or obligations the business owes and will pay off within one year. Common examples include:
  • Accounts payable
  • Credit cards
  • Accrued expenses
  • Deferred revenue
  • Payroll and sales taxes payable
  • Loans due within 1 year
• Long-term liabilities: These represent obligations the business owes and will pay off over a period longer than one year. Common examples include:
  • Bonds and notes payable due in over 12 months
  • Mortgages due in over 12 months
  • Long-term deferred revenue

See liabilities on reports

Liabilities are presented on your balance sheet. They're reported in two distinct sections: current liabilities and long-term liabilities.

Accounting for liabilities

Here's an example of how you can account for a simple, new liability.

Example

Your company receives an invoice for $1,000 worth of office supplies. The payment isn't due for 60 days, so you don't need to pay it yet. When you receive the invoice you would create a journal entry:

When you pay off the invoice alter, create a payment entry to decrease the liability and decrease cash.

Common liability accounts

Here are some additional scenarios beyond simple loans and accounts payable when money your business receives is accounted for as a liability.

Deferred Revenue

You can use this account when you've been paid for something but haven't provided the goods or services yet. Technically, you should not recognize the revenue when money changes hands, but when you've fulfilled your obligation to your customer. So, you count this money as a liability—something the business owes—until you've provided the goods or services. Learn more.

Owner loans

Maybe you paid for something out of pocket personally, but your business needs to reimburse you. If you're a business owner, this would be accounted for as a loan to the business from yourself until you're paid back. Note, that if you don't plan to be reimbursed, the money you spent would be equity instead.

Accrued expenses

Accrued expenses track costs you've already incurred but you haven't been invoiced for (or paid) yet. This account is used for things like:

• Accrued payroll and bonuses
• Accrued interest
• Other expenses incurred but not yet billed

When you receive the actual bills, the accrued expenses are moved to Accounts Payable.

Disclaimer: This article is provided for general informational and educational purposes only and is not intended to provide accounting, tax, legal, or financial advice.