Liabilities in Accounting

Liabilities in accounting are the financial obligation of the company as a result of any past events which are legally binding on it to be payable to the other entity, settling of which requires an outflow of the different valuable resources of the company, and these are shown in the balance of the company.

Assets and liabilities in accounting are two significant terms that help businesses keep track of what they have and what they have to arrange for.  The latter is an account in which the company maintains all its records such as debts, obligations, payable income taxes, customer deposits, wages payable, and expenses incurred.

1. In accounting, liabilities are debts that a corporation owes to another entity due to past transactions that are legally required to pay them. 
2. These debts force the company to expend various valuable resources, as shown in the company's balance sheet.
3. Savings accounts, current accounts, fixed deposits, recurring deposits, and any other types of deposits made by the customer are all included in a bank's accounting liabilities. 
4. These accounts function similarly to money that customers will pay immediately or over a specific time upon demand.

Liabilities in accounting meaning show it as an obligation, which makes the companies legally bound to pay back as they do in case of a debt or for the services or the goods consumed or utilized. They are settled over a particular period. Liability accounts will normally have a credit balance.

Some of the liabilities in accounting examples are accounts payable, Expenses payable, salaries payable, and interest payable. The opposite word of liability is an Asset.

For a bank, accounting liabilities include a savings account, current account, fixed deposit, recurring deposit, and any other kinds of deposit made by the customer. These accounts are like the money to be paid to the customer on the demand of the customer instantly or over a particular period. These accounts for an individual are referred to as assets.

Liabilities are classified into three categories – current, non-current, and contingent.

#1 - Current Liabilities

Current liabilities are the obligations of a company that are supposed to be paid within twelve months or a year. These are generally called as Short term Liabilities

#2 - Non-Current Liabilities

Non-Current liabilities are the obligations of a company that are supposed to be paid or settled on a long-term basis, generally more than a year. These are generally called Short term Liabilities.

#3 - Contingent Liabilities

Source: Facebook SEC Filings

Contingent Liabilities are obligations that may or may not occur. These obligations may arise due to specific situations and conditions.

The list of liabilities in accounting has been cited here as the best examples to make one understand the true meaning of the term:

Example 1 - Current Liabilities

Here is the list of current liabilities in accounting are:

• Accounts payable - are payables to suppliers concerning the invoices raised when the company utilizes goods or services.
• Interest payable - The interest amount paid to the lenders on the money owed, generally to the banks.
• Accrued Expenses - These are the expense, i.e., the salaries which are payable to the employees in the future.
• Dividends - The dividends are declared to the shareholders by the company and are yet to be paid to the shareholders.
• Customer deposits - The deposits made by the customer for the utilization of the goods or services;
• Taxes payable -The taxes payable include many types of taxes like Income tax, Sales Tax, Professional Tax, Payroll tax.
• Bank Account overdrafts - These are the facilities given normally by a bank to their customers to use the excess credit when they don’t have sufficient funds.
• Current Maturities - This is the part of long term debt that is going to mature and due within the next twelve months.
• Bills payable - These bills generally include utility bills, i.e., electricity bill, water bill, and maintenance bills, which are payable.

Example 2 - Non-Current Liabilities

Here is the list of non-current liabilities in accounting-

• Bonds Payable - This is a liability account that contains the amount owed to bondholders by the issuer.
• Long term Loans - Long-term loans are loans that are taken and to be repaid in a longer period, generally more than a year.
• Customer Deposits - The customer which is taken for a very long maturity of more than a year, generally a Fixed deposit in a bank or for any longer duration contract;
• Mortgage Payable - This is the liability of the owner to pay the loan for which it has been kept as security and to be payable in the next twelve months.
• Unearned Revenue - unearned revenue arises when the company failed to deliver to the goods or services but has taken the money in advance.
• Deferred income taxes - The income taxes that are due for the current period and have not yet been paid;
• Capital Lease - This is a lease agreement made between the owner and the person who wants the temporary use

Example 3 - Contingent Liabilities

Here are some of the most common forms of contingent liabilities in accounting:

• Potential Lawsuits- This arises when a person gives a guarantee for another party if the actual party fails to pay the debt in time.
• Product Warranty - When a warranty is given on a product for a certain time and the item gets damaged or spoiled, the company is liable to pay for it;
• Pending Investigations- Any pending investigations by the law, suppose if found defaulter than supposed to pay the penalty.

Liabilities in accounting are recorded as financial obligations, but these act as the most efficient resource for companies to fund capital expansion. In case of sudden requirements, a liability helps entities pay for operations and then return the finance as applicable to the lenders.

Liabilities are an effective way of getting money and is preferred over raising capital using equity. Though taking up these finances make you obliged as you owe someone a significant amount, these let you accomplish the tasks more smoothly in exchange for repayments as required.

This article has been a guide to what are Liabilities In Accounting. Here we explain its examples with the list of liabilities, their types, and their importance. You can learn more about from the Accounting following articles –

• Types of Liabilities on the Balance Sheet
• Calculate Current Account
• Current Liabilities Formula
• Accounts Payable vs. Notes Payable