Liabilities

Liabilities are a business's obligations to others: amounts it must pay, or goods and services it must deliver, because of something that has already happened. Supplier invoices not yet paid, bank loans, wages earned by staff, sales tax collected for the government and customer deposits are all liabilities.

Where they sit

Liabilities appear on the balance sheet, between assets and equity, and the three are tied together by the accounting equation: assets = liabilities + equity. Everything a business owns was paid for either with what it owes or with what its owners put in and left in.

Current and long-term

• Current liabilities are due within a year: accounts payable, accrued expenses, wages payable, sales tax and payroll deductions owing, the part of a loan due this year, and unearned revenue.
• Long-term liabilities are due later: term loans, mortgages, bonds and long-term leases.

Comparing current liabilities with current assets gives working capital and the current ratio, the quick checks of whether a business can pay what falls due soon.

Liabilities versus expenses

The two are linked but not the same. An expense reduces profit for a period. A liability is an amount still owed. When a supplier invoice is approved, the business records the expense and a liability in accounts payable. When the invoice is paid, the liability goes away and cash goes down. The expense doesn't change.

In everyday language

Outside accounting, liability means legal responsibility, as in liability insurance or a limited liability company. The accounting meaning is narrower: an amount the business owes today.