What Is Included in Liabilities on a Balance Sheet?

A liability represents an obligation or debt owed by an individual or entity to another party. These obligations arise from past transactions or events and require a future sacrifice of economic benefits, often in the form of money, goods, or services. Liabilities are a component of a balance sheet, providing insight into an entity’s financial position at a specific point in time. They reflect the claims of creditors against the entity’s assets and help understand its financial health.

Understanding Liability Classifications

Liabilities are divided into two main categories: current liabilities and non-current liabilities. This classification is based on the timeframe within which the obligation is expected to be settled. Current liabilities are those due within one year or the normal operating cycle, whichever is longer.

Non-current, or long-term, liabilities represent obligations not expected to be settled within one year. This distinction is important for assessing an entity’s liquidity, its ability to meet short-term obligations, and its solvency, its ability to meet long-term obligations.

Common Current Liabilities

Accounts payable represents money owed to suppliers for goods or services purchased on credit. For instance, if a business buys office supplies from a vendor and agrees to pay within 30 days, this creates an accounts payable liability.

Salaries and wages payable refers to the amount of compensation employees have earned but not yet received. Businesses pay employees on a bi-weekly or monthly basis, so at any given balance sheet date, there will be accrued wages owed. Unearned revenue, also known as deferred revenue, arises when a customer pays for goods or services in advance before the entity has delivered them. An example is a software company receiving a payment for an annual subscription upfront, creating an obligation to provide the software service over the year.

Short-term notes payable are formal, written promises to pay a specific amount of money within one year, often bearing interest. These can be issued to banks or other lenders for short-term financing needs. The current portion of long-term debt refers to the portion of a long-term loan that is due for repayment within the next 12 months. For example, if a business has a five-year loan, the principal amount scheduled to be paid in the upcoming year would be classified as a current liability.

Common Non-Current Liabilities

Long-term notes payable are similar to short-term notes but have repayment terms exceeding 12 months. These often involve significant amounts and are used for long-term investments or financing. Bonds payable represent a form of long-term debt where an entity borrows money by issuing bonds to investors, promising to pay interest periodically and the principal amount at maturity, typically several years in the future.

Deferred tax liabilities arise from differences between accounting rules for financial reporting and tax rules for income tax purposes. This occurs when a company recognizes revenue or expenses at different times for financial statements compared to its tax return, leading to lower tax payments in the current period but higher payments in the future. Lease liabilities represent an entity’s obligation to make lease payments for the right to use an asset over a period. These are recognized when a company enters into a lease agreement, reflecting the present value of future lease payments.