What Are Examples of Liabilities in Accounting?

In accounting, liabilities represent financial obligations or debts that an individual or company owes to other entities. These are claims on a company’s assets that must be settled in the future. Liabilities are a fundamental aspect of financial reporting, providing insight into what a person or company is obligated to pay.

Understanding Current Liabilities

Current liabilities are financial obligations expected to be settled within one year or one operating cycle, whichever period is longer. These are short-term debts a business must address promptly. Managing current liabilities is important for maintaining a company’s liquidity, its ability to meet short-term financial obligations.

One common example is accounts payable, money a company owes to its suppliers for goods or services purchased on credit. For instance, a retail shop might receive inventory from a vendor with an invoice due in 30 days. This creates an accounts payable liability until payment is made.

Another example is short-term loans, borrowings that must be repaid within a year. A business might take out a short-term loan from a bank to manage temporary cash flow needs, such as covering seasonal operational costs. Accrued expenses also fall into this category; these are expenses incurred but not yet paid or invoiced. This includes salaries earned by employees or utility services used before the monthly bill arrives.

Unearned revenue, also known as deferred revenue, represents payments received from customers for goods or services not yet delivered or performed. If a software company receives an upfront payment for a one-year subscription, the portion of the service not yet provided is unearned revenue, a liability “earned” over time as the service is delivered.

Understanding Non-Current Liabilities

Non-current liabilities, also known as long-term liabilities, are financial obligations not expected to be settled within one year or one operating cycle. These debts have a repayment period extending beyond twelve months. Long-term liabilities are an important part of a company’s financial structure, often used to finance significant assets or long-term projects.

Long-term debt is a primary example, encompassing obligations like mortgages, bonds payable, and long-term bank loans. A manufacturing company, for instance, might take out a 15-year mortgage to purchase a new factory. The principal amount of this mortgage, excluding the portion due within the next year, is classified as a long-term liability.

Deferred tax liabilities are another type of non-current liability. These arise when there is a difference between a company’s financial accounting income and its taxable income, leading to taxes paid in a future period. For example, if a company uses different depreciation methods for financial reporting versus tax reporting, it might report more income for accounting purposes, creating a future tax obligation.

Pension obligations represent a company’s future commitments to pay retirement benefits to its employees. If a company offers a defined benefit pension plan, it has a long-term liability for future payments to its retirees. These obligations accrue over an employee’s working life and are settled far into the future.

Where Liabilities Appear

Liabilities are prominently displayed on a financial statement called the balance sheet. The balance sheet provides a snapshot of a company’s financial position at a specific moment. It presents what a company owns (assets), what it owes to others (liabilities), and the owners’ remaining stake (equity).

On the balance sheet, liabilities are organized into two main sections: current liabilities and non-current liabilities. This separation helps users of the financial statements understand the short-term and long-term financial commitments of the company. The total of assets always equals the sum of liabilities and equity, forming the fundamental accounting equation.