What Are Liabilities?

In accounting terms, liabilities are existing debts that a business owes to another business, organization, vendor, employee, or government agency (such as the Internal Revenue Service.) Liabilities are incurred in the regular course of business operation. They can fluctuate daily as new debt is added to increase the liability and payments are made to reduce debt and liability.

Businesses are legally obligated to pay the liabilities. Most liabilities are paid with cash, check or credit card; however, bartering can also be used.   

Typically, liabilities are split into two types:  short-term (also called current) and long-term. Short-term liabilities are those obligations that will be paid within one calendar year or 12-month period, such as utility bills, wages and salaries payable (payroll), supplies invoices, sales tax payable, employment taxes due and income taxes payable. Accounts Payable is also considered a short-term liability.  

Payment for long-term liabilities extends beyond one year and can include accrued expenses, a five-year loan for a truck used for business activity, mortgages payable, bonds payable, and notes payable.

Liabilities are tracked as new debt is incurred and existing debt is paid. A financial statement called a Balance Sheet is used to report liability accounts with each balance due. The balance sheet is one of the primary financial statements used by business owners and accountants. It is also something a creditor may ask to review to determine the level of risk involved when working with a specific business. 

Short-term liabilities appear first on the right side of the Balance Sheet.  Long-term liabilities are listed after total short-term liabilities and before Owner’s Equity. Both types of liabilities normally carry credit balances.  

On the Balance Sheet, liabilities would be recorded using the following format:

Assets

 

Liabilities

 
 Cash $17,500.00   Accounts Payable $735.00 
 Accounts Receivable $12,432.00   Notes Payable $1500.00 
 Inventory $8,230.09   Total Short-Term Liabilities $2,235.00 
 Total Current Assets $38,162.09   Paid in Capital $500.00 
 Office Furniture $3,510.00   Total Long-Term Liabilities $500.00 
 Office Equipment $ 6,107.00     
 Total Long-Term Assets $ 9,617.00   Total Liabilities $2,735.00 
     Equity  
     Owner’s Equity $20,000.00 
     Retained Earnings $25,044.09 
       
 Total Assets $47,779.09   Total Liabilities and Equity $47,779.09 

This article is provided by Patriot Software, Inc., developer of online small business software for U.S. employers, including payroll software, time and attendance software, applicant tracking software, human resources software, an employee portal, as well as a payroll tax filing service. For more information, visit www.PatriotSoftware.com.


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