Types of Financial Liabilities: Example and Explanation

Examples of liabilities include deferred taxes, credit card debt, and accounts payable. Having a better understanding of liabilities in accounting can help you make informed decisions about how to spend money within your company or organization. FreshBooks Software is a valuable tool that can help businesses efficiently manage their financial health. Liabilities are one of 3 accounting categories recorded on a balance sheet, along with assets and equity. At month or year end, a company will account for the current portion of examples of liability accounts long-term debt by separating out the upcoming 12 months of principal due on the long-term debt.

Example of Current Liabilities

When the goods or services are provided, this account balance is decreased and a revenue account is increased. An asset account which is expected to have a credit balance (which is contrary to the normal debit balance of an asset account). For example, the contra asset account Allowance for Doubtful Accounts is related to Accounts Receivable. The contra asset account Accumulated Depreciation is related to a constructed asset(s), and the contra asset account Accumulated Depletion is related to natural resources. The contra asset account which accumulates the amount of Depreciation Expense taken on Equipment since the equipment was acquired.

Where Do Current Liabilities Appear in the Financial Statements?

As an essential ingredient in financial forecasting, pro forma statements let you try on the future for size—and see which business moves are the right fit for you. In most cases, lenders and investors will use this ratio to compare your company to another company. A lower debt to capital ratio usually means that a company is a safer investment, whereas a higher ratio means it’s a riskier bet.

• For example, an entity routinely records provisions for bad debts, sales allowances, and inventory obsolescence.
• Tax liability can refer to the property taxes that a homeowner owes to the municipal government or the income tax they owe to the federal government.
• A balance on the right side (credit side) of an account in the general ledger.
• Based on their durations, liabilities are broadly classified into short-term and long-term liabilities.
• Your friend is probably not keeping track of the favors they owe you, at least not on paper, but you’ll remember that they have a liability to return your favor.
• This represents expenses that have been incurred but not yet paid for, such as salaries, rent, and utilities.

What are liabilities?

Be mindful of interest rates; they can be higher than long-term loans. Interest payable is the amount of interest you’ve accrued on debts but haven’t paid yet. If you’ve taken out loans or issued bonds, you’ll have interest to pay. This liability shows how much interest expense has accumulated since the last payment.

Short-Term Loans

The credit balance in this account comes from the entry wherein Bad Debts Expense is debited. The amount in this entry may be a percentage of sales or it might be based on an aging analysis of the accounts receivables (also referred to as a percentage of receivables). A related account is Insurance Expense, which appears on the income statement. The amount in the Insurance Expense account should report the amount of insurance expense expiring during the period indicated in the heading of the income statement. The $1,500 balance in Wages Payable is the true amount not yet paid to employees for their work through December 31. The $13,420 of Wages Expense is the total of the wages used by the company through December 31.

Liabilities are obligations that a company owes financial institutions, expected to be paid at the maturity date. A company’s assets are economically valuable resources used to get more future benefits. Mortgage payable is a type of long-term debt for purchasing property for business activities. Long-term liabilities have higher interest rates due to the wide gap between the Bookkeeping for Etsy Sellers time of borrowing and repayment. In accounting, liabilities are classified as either current or non-current based on their due date.

• Liability accounts are essential for businesses to keep track of their financial obligations.
• Accrued Expenses are expenses that a company has incurred but not yet paid.
• Post-employment benefits, such as pensions and other retirement plans, are long-term non-current liabilities that companies must fund to ensure future obligations to their employees.
• It’s like taking out a mortgage to buy a house—you’ll be paying it off for a while, but it’s meant to add value over time.
• Business owners typically have a mortgage payable account if they have business property loans.
• The balance in Repairs & Maintenance Expense at the end of the accounting year will be closed and the next accounting year will begin with $0.
• Current liabilities are used as a key component in several short-term liquidity measures.

The importance of liabilities when acquiring or selling a company

Conversely, companies might use accounts payable as a way to boost their cash. Companies might try to lengthen the terms or the time required to pay off the payables ledger account to their suppliers as a way to boost their cash flow in the short term. Typically, vendors provide terms of 15, 30, or 45 days for a customer to pay. This means that the buyer can receive supplies but pay for them at a later date.