As a business owner, incurring debts is inevitable. In fact, the average small business owner has $195,000 of debt.
Chances are, you have some kind of debt at your business. And if you have debt, you have liabilities. Read on to learn all about the different types of liabilities in accounting.
What are liabilities?
Liabilities are current debts your business owes to other businesses, organizations, employees, vendors, or government agencies. You typically incur liabilities through regular business operations.
Your liabilities continuously go up and down. If you have more debts, you’ll have higher liabilities. Paying off your debts helps lower your business’s liabilities.
With liabilities, you typically receive invoices from vendors or organizations and pay off your debts at a later date. The money you owe is considered a liability until you pay off the invoice.
Loans are also considered liabilities. You can take out loans to help expand your small business. A loan is considered a liability until you pay back the money you borrow to a bank or person.
Types of liabilities in accounting
Liabilities can be broken down into two main categories: current and noncurrent.
Current liabilities are short-term debts that you pay within a year. Types of current liabilities include employee wages, utilities, supplies, and invoices.
Noncurrent liabilities, or long-term liabilities, are debts that are not due within a year. List your long-term liabilities separately on your balance sheet. Accrued expenses, long-term loans, mortgages, and deferred taxes are just a few examples of noncurrent liabilities.
Different types of liabilities in accounting
Now that you’ve brushed up on liabilities and how they can be categorized, it’s time to learn about the different types of liabilities in accounting.
Types of liabilities vary from business to business. A larger company likely incurs a wider variety of debts while a smaller business has fewer liabilities.
Some types of liabilities you might have include:
- Accounts payable
- Income taxes payable
- Interest payable
- Accrued expenses
- Unearned revenue
- Mortgage payable
Even if you’re not an accounting guru, you’ve likely heard of accounts payable before. Accounts payable, also called payables or AP, is all the money you owe to vendors for things like goods, materials, or supplies.
Many companies purchase inventory from vendors or suppliers on credit. Once the vendor provides the inventory, you typically have a certain amount of time to pay the invoice (e.g., 30 days). The obligation to pay the vendor is referred to as accounts payable.
Because you typically need to pay vendors quickly, accounts payable is a current liability.
Income taxes payable
Your business is most likely subject to income tax. Income taxes payable is your business’s income tax obligation that you owe to the government. Income taxes payable are considered current liabilities.
If you have employees, you might also have withholding taxes payable and payroll taxes payable accounts. Like income taxes payable, both withholding and payroll taxes payable are current liabilities.
When you owe money to lenders or vendors and don’t pay them right away, they will likely charge you interest.
Interest payable makes up the amount of interest you owe to your lenders or vendors. Interest payable can include interest from bills as well as accrued interest from loans or leases.
Because accounting periods do not always line up with an expense period, many businesses incur expenses but don’t actually pay them until the next period. Accrued expenses are expenses that you’ve incurred, but not yet paid.
Here are a few accrued expense accounts:
- Salaries payable
- Rent payable
- Utilities payable
Unlike most other liabilities, unearned revenue or deferred revenue doesn’t involve direct borrowing. Your business has unearned revenue when a customer pays for goods or services in advance. Then, the transaction is complete once you deliver the products or services to the customer.
Mortgage payable is the liability of a property owner to pay a loan. Essentially, mortgage payable is long-term financing used to purchase property. Mortgage payable is considered a long-term or noncurrent liability.
Business owners typically have a mortgage payable account if they have business property loans.
Liabilities and your balance sheet
Your business balance sheet gives you a snapshot of your company’s finances and shows your assets, liabilities, and equity.
Liabilities play a huge role in your balance sheet. Continually record liabilities as you incur or pay off debts. If you don’t update your books, your report will give you an inaccurate representation of your finances.
Track your debts on the right-hand side of your balance sheet. List short-term (current) liabilities first on your balance sheet. Record noncurrent or long-term liabilities after your short-term liabilities.
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This article is updated from its original publication date of October 8, 2019.This is not intended as legal advice; for more information, please click here.