LIABILITIES

Liabilities 

They are obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be thought of as a source of the company's assets. 

They can also be thought of as a claim against a company's assets. For example, a company's balance sheet reports assets of $100,000 and Accounts Payable of $40,000 and owner's equity of $60,000. The source of the company's assets are creditors/suppliers for $40,000 and the owners for $60,000.

 The creditors/suppliers have a claim against the company's assets and the owner can claim what remains after the Accounts Payable have been paid.

Liabilities also include amounts received in advance for future services. Since the amount received (recorded as the asset Cash) has not yet been earned, the company defers the reporting of revenues and instead reports a liability such as Unearned Revenues or Customer Deposits.

Types of Liabilities:

Liabilities are reported on a balance sheet and are usually divided into two categories:

Current liabilities – these liabilities are reasonably expected to be liquidated within a year. They usually include payables such as wages, accounts, taxes, and accounts payable, unearned revenue when adjusting entries, portions of long-term bonds to be paid this year, and short-term obligations (e.g. from purchase of equipment). Current liabilities are obligations whose liquidation is reasonably expected to require the use of current assets, the creation of other current liabilities, or the provision of services within the next year or operating cycle, whichever is longer.

Long-term liabilities – these liabilities are reasonably expected not to be liquidated within a year. They usually include Banks long-term Loans, issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

Liabilities of uncertain value or timing are called provisions.

Examples of liability accounts reported on a company's balance sheet include:

• Notes Payable
• Accounts Payable
• Salaries Payable
• Wages Payable
• Interest Payable
• Other Accrued Expenses Payable
• Income Taxes Payable
• Customer Deposits
• Warranty Liability
• Lawsuits Payable
• Unearned Revenues
• Bonds Payable
• Etc.

These liability accounts will normally have credit balances.


Contra liabilities are liability accounts with debit balances. (A debit balance in a liability account is contrary—or contra—to a liability account's usual credit balance.) Examples of contra liability accounts include:

• Discount on Notes Payable
• Discount on Bonds Payable
• Etc.