Liability: Definition, Types, Example, and Assets vs Liabilities

The balance sheet, for example, consists of both the liabilities of a company, as well as its assets. A short-term loan payable is an obligation usually in the form of a formal written promise to pay the principal amount within one year of the balance sheet date. Short-term loans payable could appear as notes payable or short-term debt.

These are events that are very likely to happen, and the cost can be reasonably estimated. Liabilities are debts or obligations a person or company owes to someone else. For example, a liability can be as simple as an I.O.U. to a friend or as big as a multibillion-dollar loan to purchase a tech company. In business, liabilities are building blocks of a company’s finances, often used to fund operations and expansions. Liabilities include everything your business owes, presently and in the future.

What is a Liability?

The $9,723.90 would be debited to interest expense, and the same amount would be credited to interest payable. A liability account is a category within the general ledger that shows the debt, obligations, and other liabilities a company has. The relationship between the financial activities of a business is established by the Accounting Equation. It illustrates the relationship between a company’s assets, liabilities, and shareholder or owner equity.

For example, buying new equipment may mean taking out a loan to finance the purchase. Using Apple’s balance sheet from 2022, we can see how companies detail current and non-current liabilities in financial statements. Contingent liabilities are a special type of debt or obligation that may or may not happen in the future. The most common example of a contingent liability is legal costs related to the outcome of a lawsuit. For example, if the company wins the case and doesn’t need to pay any money, it does not need to cover the debt.

Non-current Liabilities

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The AT&T example has a relatively high debt level under current liabilities. With smaller companies, other line items like accounts payable (AP) and various future liabilities like payroll, taxes will be higher current debt obligations. Liabilities are categorized https://www.bookstime.com/articles/accounting-errors as current or non-current depending on their temporality. They can include a future service owed to others (short- or long-term borrowing from banks, individuals, or other entities) or a previous transaction that has created an unsettled obligation.

How are contingent liabilities included in the financial statements?

Some of the liabilities in accounting examples are accounts payable, Expenses payable, salaries payable, and interest payable. Current liabilities are the debts that a business expects to pay within 12 months while non-current liabilities are longer term. When a company deposits cash with a bank, the bank records a liability on its balance sheet, representing the obligation to repay the depositor, usually on demand.

Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience. He brings his expertise to Fit Small Business’s accounting content. A liability is something that is borrowed from, owed to, or obligated to someone else. It can be real (e.g. a bill that needs to be paid) or potential (e.g. a possible lawsuit). Liabilities refer to things that you owe or have borrowed; assets are things that you own or are owed.

Types of Liability Accounts – Examples

Current assets are expected to be sold or otherwise used up in the near future. These assets are readily available for discharging an enterprise’s liabilities. Fixed assets are assets acquired for beneficial use and held permanently in the business.

• The latter is an account in which the company maintains all its records such as debts, obligations, payable income taxes, customer deposits, wages payable, and expenses incurred.
• Tim is a Certified QuickBooks Time (formerly TSheets) Pro, QuickBooks ProAdvisor, and CPA with 25 years of experience.
• Your organization would fall into a solvency crisis if you are unable to pay the long-term liabilities when they are due.
• The primary classification of liabilities is according to their due date.

In business, the liabilities definition in accounting refers to the debts or financial obligations of the business which are owed out to others. Liabilities are the things that decrease a business’s value since they don’t own these items and they must be given out to other businesses or customers. Liabilities can take many forms, from money owed for operating expenses to bills incurred by the business to the inventory that is owed to customers. Other liabilities include notes payable, accounts payable, and sales taxes.