Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (2024)

Business Courses/Financial Accounting: Help and ReviewCourse

Kristen Rogers, Shawn Grimsley
  • AuthorKristen Rogers

    Kristen earned a Bachelor of Arts in Communication (cum laude) and certification in SEO and digital advertising. She has several years of academic writing with industry experience as a tutor, business writer, manager at a Fortune 100 company, and news producer. She's taught English, business, education, and art.

  • InstructorShawn Grimsley

    Shawn has a masters of public administration, JD, and a BA in political science.

Explore liabilities in accounting. Learn the definition of a liability and understand how it differs from assets. Discover various liabilities examples.Updated: 11/21/2023

Frequently Asked Questions

What are five examples of liabilities?

Liabilities include any debts or bills owed to others. Some common liabilities in business include payroll, utilities, rent payments, interest owed to lenders, and orders listed in accounts payable that is owed to customers.

What are the types of liabilities?

There are two types of liabilities: short-term liabilities and long-term liabilities, Short-term liabilities are due within the current year, while long-term liabilities are not due within the current period.

What are the three types of liabilities?

There are two main types of liabilities, which include short-term liabilities and long-term liabilities. Another type is referred to as contingent liabilities, which means the item may become a liability, depending on the circ*mstances.

Table of Contents

  • What is a Liability?
  • Assets vs. Liabilities
  • Role of Assets and Liabilities in Accounting Equation
  • Types of Liabilities
  • Liabilities Examples
  • Lesson Summary
Show

In business, the liabilities definition in accounting refers to the debts or financial obligations of the business which are owed out to others. Liabilities are the things that decrease a business's value since they don't own these items and they must be given out to other businesses or customers. Liabilities can take many forms, from money owed for operating expenses to bills incurred by the business to the inventory that is owed to customers. Some common examples of liabilities that are owed by a business include the salaries that are owed to employees, the products that are owed to customers, payments owed on a lease, and payments due to vendors for supplies. other liabilities include notes payable, accounts payable, and sales taxes. Any obligations that the business owes to others are classified as liabilities of the business.

The liabilities of a business must be recorded and accounted for to keep track of all costs. In order for the business to keep track of what is owed to others, they should be recorded within the business's accounts and financial statements. The balance sheet, for example, consists of both the liabilities of a company, as well as its assets.

To unlock this lesson you must be a Study.com Member.
Create your account

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (1)

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

You must cCreate an account to continuewatching

Register to view this lesson

Are you a student or a teacher?

Create Your Account To Continue Watching

As a member, you'll also get unlimited access to over 88,000lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help yousucceed.

Get unlimited access to over 88,000 lessons.

Try it now

It only takes a few minutes to setup and you can cancel any time.

Already registered? Log in here foraccess

Back

Resources created by teachers for teachers

Over 30,000 video lessons& teaching resources‐allin one place.

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (2)

Video lessons

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (3)

Quizzes & Worksheets

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (5)

Lesson Plans

I would definitely recommend Study.com to my colleagues. It’s like a teacher waved a magic wand and did the work for me. I feel like it’s a lifeline.

Jennifer B.

Teacher

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (6)

Try it now

Back

Coming up next:Long-Term Debt | Formula, Types & Examples

You're on a roll. Keep up the good work!

Take QuizWatchNext Lesson

Replay

Just checking in. Are you still watching?

Yes! Keep playing.

Your next lesson will play in10 seconds

  • 0:05 Liabilities Defined
  • 1:07 Basic Accounting Equation
  • 1:36 Examples
  • 2:31 Lesson Summary

View Video Only

Save

Timeline

16K views

  • Video
  • Quiz
  • Course
  • Video Only

If liabilities are owed, then what are assets? In business, assets are the things that are considered of value for the business. Assets are the opposite of liabilities. These are the items owned by the business, which increases its overall worth. Liabilities, on the other hand, decrease the overall value since they are deducted from the business's revenue.

Assets include things such as inventory, equipment, supplies, intellectual property, and land. Assets also include the business's cash. Tangible assets are the items that can easily be valued, while intangible assets are the things that can bring value to a business but are not physical in form. Intangible assets include intellectual property, such as copyrights and patents, which is difficult to value.

To unlock this lesson you must be a Study.com Member.
Create your account

On a balance sheet, which is a financial statement used by businesses, both assets and liabilities are represented. The assets are placed on the left side of the document, while the liabilities are placed on the right side of the document, along with shareholders' equity. Shareholders' equity, also referred to as owners' equity, represents the amount that goes to the business owners or shareholders after all expenses are considered. The balance sheet essentially balances out what the business owns with what it owes to others.

From the data in the balance sheet, the total amounts of assets and liabilities can be determined. Assets and liabilities can also be calculated from the accounting equation:

Assets = Liabilities + Shareholders' Equity

By adding up the total liabilities plus the shareholders' equity, the total amount for assets results from the equation. In the same way, liabilities in accounting can be calculated by converting the equation as:

Liabilities = Assets - Shareholders' Equity

To unlock this lesson you must be a Study.com Member.
Create your account

Liabilities in accounting are categorized depending on when they are due or must be paid. The two main types of liabilities are short-term liabilities and long-term liabilities. Short-term liabilities are the debts or obligations due within the current period, which is usually one year. This means the bills and other debts owed must be paid within this period. This includes any obligations owed to other businesses, lenders, or customers. Short-term liabilities may also be referred to as current liabilities.

Long-term liabilities are the debts and obligations that are owed by the company but are not due to be paid within the current period. This means the bills and debts owed don't need to be paid out within the year. This typically includes payments owed to other businesses and lenders. Long-term liabilities are also referred to as noncurrent liabilities.

Contingent liabilities are another type which refer to the things that could become liabilities, depending on certain situations. These liabilities are contingent as they depend on the potential changes that may take place within certain business transactions. These cannot yet be listed as liabilities since they cannot be measured or determined. For example, assets sold between businesses may consist of contingent liabilities that can occur due to the other findings that take place after the acquisition.

To unlock this lesson you must be a Study.com Member.
Create your account

Some common liabilities examples in business may be classified as either short-term liabilities or long-term liabilities.

Examples of Short-Term Liabilities

Short-term liabilities are owed within the same year. Whether the bill is due within a week or eight months, it is considered a short-term liability since it is due within the specified business period. Some examples of short-term liabilities include:

  • Employee payroll or salaries due within the month
  • Operating expenses, such as supplies or materials, that must be paid to suppliers within three months
  • Rent for a building that must be paid on a monthly basis within the current year
  • Bills owed for utilities within the month
  • Orders listed in accounts payable due to customers within two weeks

Examples of Long-Term Liabilities

Long-term liabilities are not due to be paid within the current year or period. They may not be due for a year and a half or even several years. Some examples of long-term liabilities include:

  • A business loan that is paid with installments and allows deferred payments for a year
  • A business credit card that was recently opened and offers an introductory rate of 0% APR with no minimum monthly payments due for 15 months
  • Certain business taxes that have been deferred or are not due within the period

To unlock this lesson you must be a Study.com Member.
Create your account

Liabilities refer to the debts or financial obligations of the business owed to others. Some examples of liabilities include, salaries owed to employees, products owed to customers, and payments owed to vendors, as well as notes payable, accounts payable, and sales taxes. Assets are opposite of liabilities as they are the things that are considered of value for the business. Liabilities are represented, along with assets, on a financial statement known as the balance sheet. Liabilities can be determined using the formula: Liabilities = Assets - Shareholders' Equity.

There are two main types of liabilities: short-term liabilities and long-term liabilities. Short-term liabilities are the debts or obligations due within a year, while long-term liabilities are the debts and obligations that are owed by the company in a year or longer than a year. Short-term liabilities are also referred to as current liabilities and include things such as payroll owed to employees within the month and orders owed to customers within two weeks. Long-term liabilities, or noncurrent liabilities, include things such as deferred taxes and credit card lines that don't require payments for 15 months. Contingent liabilities are another type which includes the things that could become liabilities, depending on certain situations, such as changes that occur after business transactions are conducted.

To unlock this lesson you must be a Study.com Member.
Create your account

Video Transcript

Liabilities Defined

Liabilities are financial obligations a business owes to other persons, businesses and governments. Short-term liabilities are financial obligations that become due within a year, while long-term liabilities are due in a year or longer. A company's total liabilities is the sum of its short-term and long-term liabilities. Liabilities are reported on a company's balance sheet along with its assets and owners' equity.

You should keep in mind that liabilities are financial obligations, not just debt. All debts are financial obligations, but not all financial obligations are debts. For example, let's say you lease a small retail space downtown and must pay rent on a monthly basis and not in arrears - in other words, May's rent is due on May 1, not June 1. Your rent obligation is a financial obligation, and therefore a liability, but it is not a debt because you pay for the use of the property for the month before you use it. If you don't pay your rent on time, it becomes a debt.

Basic Accounting Equation

Liabilities are one of the three components of the basic accounting equation: Assets = Liabilities + Equity. Assets are the value of the property owned by a company, equity is the owner's capital in the company, and liabilities, as you know, are the financial obligations of the business. If you perform the relevant algebraic operation on the equation, you will come up with the formula for determining liabilities: Liabilities = Assets - Equity.

Examples

Let's look at some examples of liabilities. We'll break them down into long-term and short-term liabilities.

Short-Term Liabilities

Here's a list of short term liabilities

  • Short-term notes payable (loans that come due in less than one year)
  • Accounts payable (money owned for goods and services provided to the business)
  • Dividends payable (dividends that have been announced but not yet paid to shareholders)
  • Sales taxes
  • Federal income taxes
  • State income taxes
  • Wages and salaries
  • Payroll taxes
  • Retirement benefits

Long-term liabilities

Here's some long-term liabilities

  • Credit line (a revolving credit account that allows you to draw upon the line for money as needed up to a set limit for a set period of time)
  • Long-term note payable (loans that are due in a year or longer)
  • Bonds (negotiable debt securities that are issued to investors to raise money)

Lesson Summary

Let's review. Liabilities are the financial obligations owed by a business to other persons, businesses, and governments. Long-term liabilities are obligations that are due in a year or longer, while short-term liabilities come due within a year. Liabilities are reported on the company's balance sheet and are also one of the three components of the basic accounting equation.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.

Become a Member

Already a member? Log In

Back

Resources created by teachers for teachers

Over 30,000 video lessons& teaching resources‐allin one place.

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (7)

Video lessons

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (8)

Quizzes & Worksheets

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (9)

Classroom Integration

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (10)

Lesson Plans

I would definitely recommend Study.com to my colleagues. It’s like a teacher waved a magic wand and did the work for me. I feel like it’s a lifeline.

Jennifer B.

Teacher

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (11)

Try it now

Back

Recommended Lessons and Courses for You

  • Related Lessons
  • Related Courses

Related Lessons

External and Internal Users and Uses of Accounting

Related Courses

Human Resource Management: Help and Review
College Macroeconomics: Homework Help Resource
Introduction to Macroeconomics: Help and Review
College Macroeconomics: Tutoring Solution
Finance 301: Corporate Finance
Business 100: Intro to Business
FTCE Business Education 6-12 (051) Prep
ILTS Business, Marketing, and Computer Education (216) Prep
ILTS Social Science - Economics (244) Prep
Supplemental Business: Study Aid
Principles of Marketing: Help and Review
DSST Human Resource Management Prep
Introduction to Human Resource Management: Certificate Program
Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com (2024)

FAQs

Liabilities in Accounting | Definition, Types & Examples - Lesson | Study.com? ›

Liabilities refer to the debts or financial obligations of the business owed to others. Some examples of liabilities include, salaries owed to employees, products owed to customers, and payments owed to vendors, as well as notes payable, accounts payable, and sales taxes.

What are liabilities in accounting with examples? ›

Liabilities are any debts your company has, whether it's bank loans, mortgages, unpaid bills, IOUs, or any other sum of money that you owe someone else. If you've promised to pay someone a sum of money in the future and haven't paid them yet, that's a liability.

What are the 7 current liabilities? ›

Current liabilities are the sum of Notes Payable, Accounts Payable, Short-Term Loans, Accrued Expenses, Unearned Revenue, Current Portion of Long-Term Debts, Other Short-Term Debts.

What are the current liabilities lesson? ›

Current liabilities are a company's short-term financial obligations that are due within one year or within a normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a company to purchase inventory and convert it to cash from sales.

How many types of liabilities are there in a balance sheet? ›

There are three primary classifications for liabilities. They are current liabilities, long-term liabilities and contingent liabilities. Current and long-term liabilities are going to be the most common ones that you see in your business.

What is a liability and its types? ›

Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, bonds, warranties, and accrued expenses. Liabilities can be contrasted with assets.

What are the three main characteristics of liabilities in accounting? ›

Liabilities often have three characteristics: They happen as a result of a previous transaction or occurrence. It establishes a present liability for future cash or service payments. Liabilities are an unavoidable burden.

What are the five most frequently used current liabilities? ›

Current liabilities
  • Type 1: Accounts payable. Accounts payable liability is probably the liability with which you're most familiar. ...
  • Type 2: Principle & interest payable. ...
  • Type 3: Short-term loans. ...
  • Type 4: Taxes payable. ...
  • Type 5: Accrued expenses. ...
  • Type 6. ...
  • Type 1: Notes payable. ...
  • Type 2: Mortgage payable.
Apr 22, 2024

What are 10 current liabilities? ›

Some examples of current liabilities that appear on the balance sheet include accounts payable, payroll due, payroll taxes, accrued expenses, short-term notes payable, income taxes, interest payable, accrued interest, utilities, rental fees, and other short-term debts.

What are the 5 non current liabilities? ›

Noncurrent liabilities include debentures, long-term loans, bonds payable, deferred tax liabilities, long-term lease obligations, and pension benefit obligations. The portion of a bond liability that will not be paid within the upcoming year is classified as a noncurrent liability.

What are the golden rules of accounting? ›

Every economic entity must present accurate financial information. To achieve this, the entity must follow three Golden Rules of Accounting: Debit all expenses/Credit all income; Debit receiver/Credit giver; and Debit what comes in/Credit what goes out.

What are two examples of current liabilities? ›

Some of the examples of current liabilities are bills payable, short term debt, accounts payable and wages.

What is an example of a fixed liability? ›

Fixed liabilities are debts which are not likely to become mature for a long period of time, typically over a year. This includes bonds, mortgages or long-term loans. Also known as long-term liabilities, these debts are included in the business's balance sheet.

What are the three major classification of liabilities? ›

Liabilities can be classified into three main categories, which are:
  • Current Liabilities.
  • Non-current Liabilities.
  • Contingent Liabilities.

What are liabilities with examples? ›

Liabilities are debts or obligations a person or company owes to someone else. For example, a liability can be as simple as an I.O.U. to a friend or as big as a multibillion dollar loan to purchase a tech company.

What liabilities should be on a balance sheet? ›

Typical long-term financial liabilities include loans (i.e., borrowings from banks) and notes or bonds payable (i.e., fixed-income securities issued to investors).

What are known liabilities examples? ›

The most common known liabilities are accounts payable, sales tax payable, payroll liabilities, and contracted notes payable. All of these debts arise from contracts, agreements, or laws that state how much the company owes, whom it owes the money, and how much it owes.

What are the examples of current and non current liabilities? ›

Examples of current liabilities include accounts payable, accruals, short-term debt, and current maturities of long-term debt. Examples of non-current liabilities include deferred tax liabilities lines, certain kinds of credit, capital and long-term leases, and bank loans.

Is savings considered as liabilities? ›

When bank customers deposit money into a checking account, savings account, or a certificate of deposit, the bank views these deposits as liabilities. After all, the bank owes these deposits to its customers, and are obligated to return the funds when the customers wish to withdraw their money.

How to get liabilities in accounting? ›

Liabilities = Assets – Shareholder's Equity

To determine the total amount of your company's liabilities, find the figures for total assets and equity on the balance sheet. You may need to apply the equity formula before proceeding.

References

Top Articles
Latest Posts
Article information

Author: Kerri Lueilwitz

Last Updated:

Views: 5837

Rating: 4.7 / 5 (67 voted)

Reviews: 82% of readers found this page helpful

Author information

Name: Kerri Lueilwitz

Birthday: 1992-10-31

Address: Suite 878 3699 Chantelle Roads, Colebury, NC 68599

Phone: +6111989609516

Job: Chief Farming Manager

Hobby: Mycology, Stone skipping, Dowsing, Whittling, Taxidermy, Sand art, Roller skating

Introduction: My name is Kerri Lueilwitz, I am a courageous, gentle, quaint, thankful, outstanding, brave, vast person who loves writing and wants to share my knowledge and understanding with you.