As part of OnlineAdvisor's efforts to educate, inform and encourage business leaders, we present key financial terms and concepts. For this article, we cover the concept of liabilities.
A Brief Definition
Liabilities represent company's financial debt or obligations. They include loans, accounts payable, mortgages, deferred revenues and accrued expenses. A great definition of a liability refers to the “state of being responsible for something.” In simple terms, this usually means it represents any money or service owed to another party.
Liabilities are a major area we manage. Seeing that they require us to do something for other companies and individuals, they must be met. They are a part of doing business, but they also can create some difficulties if we ignore them. Also, they can create even more difficulties if we don't meet their requirements.
Current and Long-Term
Businesses break out their liabilities into two categories: current and long-term. It's easy to remember the difference between a current liability and a long-term liability. A current liability covers all the debts we plan to pay in full within one year. A long-term liability covers all the debts we will pay off over a longer period.
Some examples of current liabilities include what we pay our employees, and invoices we haven't paid for the goods and services we order for our organization during the year. This includes money owed to vendors, monthly utilities, and similar expenses.
Debt is probably the most common long-term liability, but it is not the only one. Items like rent, taxes we haven't paid yet, and items connected with payroll are also long-term liabilities.
Expense vs. Liability
Please don't mix up an expense with a liability. They are not the same. A liability is listed on a company's balance sheet, while an expense are listed on the company's income statement. An expense is a part of the costs of a company's operation, while a liability is part of the different kinds of agreements and debts a company owes.