Liabilities in Business Explained: 3 Types of Liabilities

In business bookkeeping, liabilities are financial obligations to outside parties. The most common type of corporate and small business liability is monetary debt. Traditionally, liabilities are listed on the right-hand side of a company's balance sheet. The liabilities section may contain both current and non-current liabilities. On the left side of the balance sheet is an accounting of the company's current assets. Corporate investors consider company debt before investing in a company and typically ask for financial statements that show the current ratio of total assets to total liabilities.

Different types of liabilities factor into business accounting equations.

1. 1. Current liabilities: Also known as short-term liabilities, current liabilities are debts that must be paid within a year's time. Examples of current liabilities include employee salaries, mortgage payments, rent payments, credit card debt, short-term loans, and sales taxes to be remitted.
2. 2. Long-term liabilities: Also known as non-current liabilities, these refer to financial obligations for the next year and beyond. Examples include deferred tax liabilities, long-term interest payments, long-term loans, future bonds payable, pensions, and other forms of long-term debt.
3. 3. Contingent liabilities: Some business owners and financial accounting professionals also list contingent liabilities on their general ledger. These are liabilities that could be owed in the future. These include refunds, lawsuit settlements, and fulfillment of product warranties.

Liabilities appear in all corners of a business's operations.

1. 1. Payments to lenders are long-term liabilities. There is an economic benefit in taking out business loans because they provide short-term liquidity. However, these loans must be reported as long-term liabilities on a balance sheet.
2. 2. Annual income taxes are short-term liabilities. Income taxes are an annual affair. By definition, they count as short-term liabilities.
3. 3. Unearned revenue can be a liability. If a company's income statement shows a deficit of anticipated revenue, this counts as a short-term liability. Companies budget for a certain level of annual cash flow, and when revenues do not meet expectations, they go to the right side of a balance sheet as a liability.

Accountants and accounting software use a couple of factors to distinguish between liabilities and expenses.

• An expense is a short-term cost of doing business. For instance, if you were to operate a corporate bank account for accounts receivable and that account came with monthly fees, you would deduct those fees from your gross profit to arrive at a net profit for the month. Operating costs (like office supplies) that the business pays back on a monthly basis are considered expenses and reported on income statements.
• Liabilities are more removed from day-to-day cash flow. Liabilities—like loans and other long-term debts—are not linked to short-term sales transactions. That said, some accrued expenses may end up as liabilities if they are paid over a long period of time. Liabilities are documented on a company’s balance sheet.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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