What Are Examples of Liabilities in Accounting?

Liabilities represent financial obligations or debts that an individual or entity owes to others. These obligations must be settled in the future, through the transfer of economic benefits like money, goods, or services. Liabilities play a fundamental role on a balance sheet, providing insight into an entity’s financial position by outlining what it owes to external parties. They are categorized based on their due date, distinguishing short-term and long-term commitments.

Common Current Liabilities

Current liabilities are financial obligations that a business expects to settle within one year or within its normal operating cycle, whichever period is longer. These debts are typically paid using current assets like cash. Understanding these liabilities helps assess a company’s immediate liquidity and ability to meet near-term financial commitments.

Accounts payable are amounts a company owes to its suppliers for goods or services purchased on credit. If a business buys office supplies or raw materials from a vendor and receives an invoice, the amount due is recorded as accounts payable. These obligations are usually settled within a short period, such as 30 to 60 days.

Short-term loans are debts due for repayment within one year. These can include lines of credit or other borrowing arrangements designed to cover immediate operational needs or temporary cash flow gaps. These loans provide quick access to funds but require prompt repayment, influencing working capital management.

Accrued expenses are costs that have been incurred by a business but have not yet been paid or formally invoiced. Examples include unpaid employee salaries, utility costs, or interest on loans. These expenses are recorded as liabilities to reflect the company’s financial obligations for the accounting period in which they occurred, even if cash outflow happens later.

Unearned revenue, also known as deferred revenue, represents money received by a company for goods or services that have not yet been delivered or provided to the customer. A software company receiving an annual subscription payment upfront records this as unearned revenue until the service is rendered. This is a liability because the company has an obligation to fulfill the service or deliver the product.

The current portion of long-term debt refers to the segment of a long-term loan or mortgage scheduled for repayment within the next 12 months. While the overall debt may span many years, the principal due in the upcoming year is reclassified as a current liability. This separation allows a clearer view of short-term liquidity needs and long-term financial structure.

Common Non-Current Liabilities

Non-current liabilities, also known as long-term liabilities, are financial obligations that are not expected to be settled within one year. These debts often finance long-term assets or operations and are crucial for assessing a company’s long-term solvency and financial leverage. They are listed separately from current liabilities.

Long-term loans and mortgages payable are debts with repayment terms extending beyond one year. Multi-year bank loans for expansion or property mortgages are common examples. These obligations involve regular payments of principal and interest over an extended period, which can range from a few years to several decades.

Bonds payable are a form of long-term debt where a company borrows money directly from investors by issuing debt instruments called bonds. The company promises periodic interest payments to bondholders and repayment of the principal at a specified maturity date, which is typically several years in the future. They are frequently used by larger entities to raise substantial capital.

Deferred tax liabilities are amounts of income taxes owed by a company but not due for payment until future periods. These liabilities often arise from temporary differences between how revenues and expenses are recognized for accounting purposes versus tax purposes. For instance, using accelerated depreciation for tax reporting while employing straight-line depreciation for financial statements can create this difference, leading to a deferred tax liability.

Pension obligations are future payments a company expects to make to retired employees under a defined benefit pension plan. These represent a significant long-term commitment, as the company is responsible for ensuring sufficient funds are available to meet future benefit payments. The calculation of these obligations involves complex actuarial assumptions about employee lifespans, salary growth, and investment returns.