What Are Some Examples of Liabilities for a Company?

A liability represents an obligation a company owes to another party, arising from past transactions or events, which will require a future outflow of economic benefits. These obligations can involve the payment of cash, the delivery of goods, or the provision of services. Understanding a company’s liabilities is important because they offer insights into its financial health and its ability to meet its commitments.

Classifying Company Liabilities

Companies categorize their liabilities primarily based on the timing of their expected settlement. Current liabilities, often referred to as short-term liabilities, are obligations that a company expects to settle within one year or within its normal operating cycle, whichever period is longer. Conversely, non-current liabilities, or long-term liabilities, are financial obligations that are not expected to be settled within one year or the operating cycle. Additionally, some obligations are classified as contingent liabilities, representing potential liabilities that may arise depending on a future event.

Short-Term Company Liabilities

Accounts payable are short-term liabilities that arise when a company purchases goods or services on credit from its suppliers. These represent amounts owed for inventory, supplies, or other operational expenses that are typically due within 30 to 90 days. Wages payable encompass salaries, commissions, and bonuses that employees have earned but have not yet received payment for as of the financial statement date. These amounts are usually paid out within a few days or weeks following the end of a pay period.

Short-term notes payable are formal written promises to pay a specific amount to a lender within one year. These often involve borrowing from banks for immediate working capital needs, with terms clearly outlining the principal amount and any interest due. Unearned revenue, also known as deferred revenue, occurs when a company receives payment for goods or services that have not yet been delivered or performed. This liability is reduced as the company fulfills its obligation, typically within the next accounting period.

The current portion of long-term debt refers to the segment of a long-term loan that is due for repayment within the next twelve months. For instance, if a company has a 10-year mortgage, the principal payments scheduled for the upcoming year would be reclassified as a current liability. Sales tax payable represents funds collected by a business from customers on behalf of a government authority. This collected sales tax does not belong to the business and must be remitted to the appropriate tax agency.

Long-Term Company Liabilities

Long-term notes payable are formal written commitments to repay borrowed funds over a period exceeding one year. These notes often involve significant principal amounts and may include interest payments spread out over several years. Bonds payable represent a form of debt issued by a company to investors, where the company promises to pay interest over a specified period and repay the principal amount at a future maturity date, typically several years or even decades away.

A mortgage payable is a long-term loan secured by real estate, such as a building or land, with payments extending over many years, often 15 to 30 years. The property serves as collateral for the loan, and the company makes regular principal and interest payments until the debt is satisfied. Deferred tax liabilities arise from differences in the timing of revenue and expense recognition between financial accounting standards and tax regulations. These liabilities indicate that a company will likely pay more income tax in future periods because certain revenues were recognized earlier for accounting purposes or expenses were deducted later for tax purposes.

Lease liabilities represent the present value of future lease payments for assets acquired under finance leases. For instance, if a company leases equipment for five years under a finance lease arrangement, the total obligation for future payments is recognized as a long-term liability on its balance sheet. This liability reflects the company’s commitment to make payments over the lease term for the right to use the leased asset.

Uncertain Company Liabilities

Contingent liabilities are potential obligations that depend on a future event. An example is product warranties, where a company obligates itself to repair or replace products that fail within a specified period after sale. A company must estimate and record a liability if it is probable that a claim will occur and the amount can be reasonably estimated.

Lawsuits represent another contingent liability, arising from ongoing or threatened legal action against the company. If it is probable that the company will lose the lawsuit and the amount of potential damages can be reasonably estimated, a liability must be recognized. Environmental cleanup costs can also be contingent liabilities for companies operating in industries with potential for environmental impact. For example, if a company’s past operations caused pollution, it may face future obligations for remediation, which become liabilities if remediation is probable and estimable.

Guarantees involve a company committing to pay a third party’s debt or fulfill an obligation if that third party defaults. This creates a contingent liability for the guarantor. For all these uncertain liabilities, disclosure in the financial statements is required if the possibility of an outflow of resources is not remote, even if the amount cannot be precisely estimated.