What Are the Three Common Liability Accounts on a Balance Sheet?

The balance sheet is a financial statement providing a snapshot of a company’s financial health at a specific point in time. It is structured around the accounting equation: Assets = Liabilities + Equity. This equation illustrates that a company’s assets are financed either by liabilities, what it owes to external parties, or by equity, the owners’ stake in the business.

Understanding Liabilities on a Balance Sheet

A liability represents what a company owes to other entities. These are obligations arising from past transactions that require a future outflow of economic benefits, such as money, goods, or services, to settle. Liabilities are categorized based on their due date.

Liabilities are classified as either current or non-current. Current liabilities are obligations due within one year or one operating cycle, whichever is longer. Non-current liabilities are obligations due in more than one year. This distinction helps stakeholders assess a company’s short-term liquidity and long-term solvency.

Accounts Payable Explained

Accounts payable are short-term obligations a company owes to its suppliers for goods or services purchased on credit. These debts typically arise from routine operational expenses and are usually informal, without interest charges unless payment is late. Common examples include purchasing office supplies, inventory, utilities, or raw materials from vendors with an agreement to pay within a short period, often 30 to 60 days.

Accounts payable are a current liability, reflecting amounts due to suppliers for which an invoice has been received.

Notes Payable Explained

Notes payable represent a more formal type of debt obligation, characterized by a written promise to pay a specific sum of money by a certain date. Unlike accounts payable, these obligations often involve interest and are typically supported by a promissory note or a formal loan agreement. Notes payable can be either short-term, due within one year, or long-term, with repayment terms extending beyond one year.

Examples include bank loans, lines of credit, or promissory notes issued for significant purchases like equipment or property. The key distinction from accounts payable lies in the formality of the agreement, the presence of interest, and often a longer repayment schedule with structured payments. Notes payable reflect the principal amount borrowed and the associated interest.

Accrued Liabilities Explained

Accrued liabilities, also known as accrued expenses, are expenses that a company has incurred but has not yet paid or formally invoiced. These obligations are recognized to accurately reflect all expenses for a given period, even if cash has not yet exchanged hands. This practice aligns with accrual accounting principles, which aim to match expenses to the period in which they are incurred.

Common examples include accrued salaries and wages, which employees have earned but not yet received by the end of an accounting period. Other instances include accrued interest on loans, utilities consumed but not yet billed, or rent owed for a period. Accrued liabilities are current liabilities, representing short-term financial obligations that will be settled in the near future.