In accounting, liabilities refer to the obligations a company or individual owes to others. These obligations arise from past transactions or events and require the entity to make a future payment or provide goods or services to settle the obligation.  

Liabilities are usually listed on the balance sheet as a separate category alongside assets and equity. They are considered a key component of a company’s financial health, representing its obligations and the potential drain on its resources.  

In this blog post, we will explore what liability means, and what are the different types of liabilities in accounting.  

What Are the Types of Liabilities in Accounting  

There are two major types of liabilities in accounting; current and non-current.   

Current Liabilities in Accounting

Current liabilities refer to the debts or obligations a company is expected to pay off within 12 months. These are short-term financial obligations that are due and payable shortly. A company’s current liabilities are an important aspect of its financial health and are closely monitored by investors, creditors, and analysts. 

Examples of current liabilities in accounting include:  

– Accounts Payable: Money owed to suppliers or vendors for goods and services purchased on credit.

– Short-term loans: Loans due within the next 12 months, including bank loans, lines of credit, and overdrafts.  

– Accrued Expenses: Expenses that have been incurred but have yet to be paid, such as salaries, rent, utilities, and taxes.  

– Customer Deposits: Payments received in advance from customers for goods or services to be delivered later.  

– Taxes Payable: Taxes owed to government authorities, such as income tax, and sales tax. 

– Unearned Revenue: Money received in advance for goods or services that still need the delivery.  

– Current portion of long-term debt: The long-term debt is due within the next 12 months.  

Overall, current liabilities are an important financial metric to understand as they provide insight into a company’s short-term financial obligations and liquidity position.  

Non-current Liabilities in Accounting

Non-current or long-term liabilities are obligations a company must pay back over more than one year. These liabilities are not due for payment in the short term and are therefore considered less urgent than current liabilities, which are due for payment within the next 12 months.  

Examples of non-current liabilities in accounting include:  

– Long-term loans: These loans have a repayment period of more than one year. They are often used to finance capital projects, such as constructing a new building or purchasing machinery and equipment.  

– Bonds payable: A bond is a debt security issued by a company that promises to pay the bondholders a fixed interest rate over a specific period. The bondholders can hold the bond until its maturity or sell it to other investors.  

– Deferred tax liabilities: These are taxes that a company owes to the government but still needs to pay. Deferred tax liabilities arise when the company has a temporary difference between its accounting and tax records.  

– Pension liabilities: These are obligations a company must pay its employees after they retire. The company must contribute to a pension fund to provide for these payments.  

– Lease liabilities: These are obligations that arise when a company enters into a lease agreement with a lessor. The company must make regular lease payments for the duration of the lease, which could be several years.  

– Contingent liabilities: These are potential liabilities that may arise in the future, depending on the outcome of a particular event, such as a lawsuit or a product recall. These liabilities are not certain but must be disclosed in the company’s financial statements.  

Liability vs. Assets in Accounting

Liability and assets are two fundamental terms in accounting that represent the financial position of a business. Here’s a detailed explanation of liability and assets in accounting:  

Liability

A liability is an obligation that a business owes to another entity, either a person or a company, and has to be paid back in the future. The obligation can arise from past transactions, present situations, or anticipated future events. In accounting, liabilities are usually categorized into current and non-current liabilities. 

Asset

An asset is something a business owns or controls and has monetary value. It can be tangible, such as land, buildings, and equipment, or intangible, such as patents, trademarks, and copyrights. In accounting, assets are categorized into current and non-current assets. Current assets can be converted into cash within one year, while non-current assets cannot be converted into cash within one year.  

Some common examples of current assets include cash, accounts receivable, inventory, and prepaid expenses. Non-current assets may include long-term investments, property, plants, and equipment.  

Liability vs. Expense in Accounting

Liability and expense are two essential concepts in accounting that often need clarification. Here’s a detailed explanation of liability and expense in accounting:  

Liability

By now, we know that there are liabilities in accounting. A liability is an obligation that a business owes to another entity, either a person or a company, and has to be paid back in the future. In accounting, a liability is recorded when an expense has been incurred, but the payment has yet to be made.  

Some common examples of liabilities in accounting include accounts payable, salaries payable, taxes payable, and loans payable.  

Expense

An expense is the cost of goods or services consumed during a business’s operations during an accounting period. In accounting, expenses are recognized when incurred, regardless of when the payment is made. Expenses reduce the income of a business and are usually classified into two types: operating and non-operating expenses.  

Some common examples of operating expenses include salaries and wages, rent, utilities, and advertising expenses. Non-operating expenses may include interest expenses and losses on the sale of assets. 

In a Nutshell 

In conclusion, liabilities in accounting are an essential aspect of accounting that helps businesses understand their financial obligations and commitments. They represent the amount of money that a company owes to others, including creditors, suppliers, and lenders. There are different types of liabilities, including current and long-term liabilities, which have their own unique characteristics and calculations. Therefore, businesses must ensure that they have a good grasp of liabilities and work with qualified accountants to maintain accurate and transparent financial records.  

Read Also: Bookkeeping For S Corporations – Everything You Need To Know

Wajiha Danish

Wajiha is a Brampton-based CPA, CGA, and Controller with 17+ years of experience in the financial services industry. She holds a Bachelor of Science Degree in Applied Accounting from Oxford Brookes University and is a Chartered Certified Accountant. Wajiha spearheads Monily as its Director and is a leader who excels in helping teams achieve excellence. She talks about business financial health, innovative accounting, and all things finances.