A Quick Overview of Liabilities in Accounting for Small Businesses

To run a business properly, understanding your finances is a must. Although you have professionals that can seamlessly handle business finances, as business owners, it is crucial to oversee your business. Liability is one of the most important aspects of a business.

In this article, we'll further discuss liabilities in accounting so you can stay on top of your day-to-day business operations.

What Is a “Liability” in Accounting?

The money due by a company to a person or another entity is referred to in accounting as liabilities. In simpler terms, these are your company's debts regardless of when they are due. Moreover, liabilities may be things with a comparable worth.

Liabilities can help businesses manage their business operations and speed up value creation. But, when handled improperly, they can harm firms significantly and, occasionally, permanently.

Different Types of Liabilities in Accounting

Several items cover business liabilities. These can be wages you need to pay your employees, unpaid taxes, or due mortgage payables. In general, liabilities are divided into two broad categories: short-term and long-term.

We'll discuss each category and provide examples to help business owners understand them better.

Short-Term Liabilities

Short-term liabilities are also called current liabilities. These are liabilities that your business needs to pay within a year, hence “short term”. These include taxes payables, vendor invoices, and wages payables.

Here are examples of current liabilities.

• Wages Payable: These are income that employees earned for a specific period that have yet to be paid or released by the employer—this liability is often seen since it's common for companies to cycle the payroll on a biweekly basis.
• Interest Payable: Businesses use credits to finance their products and services for short periods. These are interests that businesses need to pay for their credit purchases.
• Dividends Payable: This represents the amount a company owes shareholders after a dividend is declared. The payment period cycles every two weeks, so these liabilities appear multiple times a year.
• Unearned Revenue: This refers to the company's liabilities to deliver its goods or services after a customer pays for them in advance. You can decrease the amount of this liability as you accomplish deliveries to your customers.
• Discontinued Operations: Most businesses pass over this special liability but should examine it more carefully. Any operations or divisions that are up for sale or have already been sold must be taken into account from a financial standpoint. This also covers the financial impacts of ending a product line.

Long-Term Liabilities

Long-term liabilities are also coined as non-current liabilities. From the name itself, these are business liabilities you are expected to pay in 12 months or more. Bonds payable or long-term debt is one example and are usually the largest of these liabilities.

Here are other examples of long-term liabilities.

• Warranty Liability: This liability is the amount of money a company will spend repairing their products depending on the agreed-upon warranty. This liability is common in technology and automobile businesses because their products usually have long-standing warranties.
• Contingent Liabilities: A contingent liability is a responsibility that might materialize based on how a future event plays out. Contingent liabilities are documented if the contingency exists, and it is relatively possible to estimate its size. Unless all requirements are unmet, the obligation may be mentioned in a footnote to the financial statements.
• Deferred Credits: These credits are revenue received but are yet to be shown as earned on the income statement. After the money is no longer deferred, this item is decreased by the sum earned and added to the firm's revenue stream. This can include client advances or a deal where credits are owed but are not yet considered revenue.
• Post-Employment Benefits: These are benefits that a company employee or a family member may receive when an employee retires. The amount can increase over time depending on how long they work and the agreement on their contract.
• Unamortized Investment Tax Credits (UITC): This is the discrepancy between an asset's historical cost and its current depreciation. The unamortized sum is a liability even though it is only a preliminary assessment of the asset's fair market value.

Expenses vs. Liabilities: What's the Difference?

An expense is a business's operational cost incurred to produce income. An expense is primarily distinguished from liabilities by how it relates to your company's revenue. Expenses and revenues are declared on income statements, while assets and liabilities appear on the balance sheet.

Furthermore, expenses can be paid quickly with cash, whereas delaying payment would make the expense a liability.

How Liabilities Work in Business

Examining how you pay for everything for your organization will help you comprehend business liabilities in a clear manner. You borrow money or use cash from a checking account to make purchases. Using a credit card is a form of borrowing, just like any other kind.

Your balance sheet depicts your company's financial health at the completion of each accounting period, listing all of your liabilities. Throughout time, liabilities may be fulfilled by the transfer of funds, products, or services.

You must list all your liabilities and add them up to get your total liabilities. A simple accounting method can be used to determine whether your books are balanced.

Liabilities + Equity = Assets

Your total liabilities and equity must match the total assets for your business to be considered balanced.

Example of Assets

You can't talk about liabilities without knowing your business assets. Assets are items with value that a company owns. Here are some prime examples of business assets.

• Cash: Cash is the most typical business asset. It is money you have for immediate disposal. Cash can be a few hundred dollars to millions depending on how big a business is.
• Security: Securities are assets that can be easily liquidated to increase the cash you have at hand.
• Inventory: Inventory is your stock of goods that you can sell for money.
• Property: This refers to any land holdings, buildings, or structures your company may possess, such as a workplace, a retail space, or undeveloped land. Direct sales or equity loans are the two most popular ways to dispose of the property. With the latter, a company can sell its property for cash without giving up ownership.
• Equipment: Business assets are equipment that continue to be valuable after being purchased. This includes any equipment the company employs and can sell for a substantial profit, such as computers, business vehicles, servers, and other high-tech pieces of equipment.

Manage Your Finances With Unloop

Managing a company's financial obligations can be confusing, especially for small businesses. Fortunately for beginners like you, Unloop can help you sort out your finances. Our bookkeeping services will keep your business in the loop for your finances. Our services include:

• Creating monthly financial statements—balance sheets, income statements, and cash flow statements.
• Subscription to accounting software such as QuickBooks and Xero.
• Unlimited financial accounts and associated monthly reconciliations.
• Creating custom analytics and KPIs specifically designed for your business.

We also offer other accounting services such as forecasting, accounts payable, payroll, and taxes. Stop worrying about your finances and let the experts handle it. Book a call with us today!