What Does the Term "Liability" Mean in Accounting - More Than Accountants

What Does the Term “Liability” Mean in Accounting

Liabilities are debts and commitments that reduce the entire value of a corporation and must be paid over a period of time. The debt might take many different forms, including company expenses, loans, unearned earnings, and legal responsibilities.

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What Kinds of Liabilities Are There?

Long-term liabilities and short-term liabilities are the two basic categories of liabilities. Both are reported on a firm’s balance sheet, which is a financial report that demonstrates the financial health of a corporation at the end of a reporting period.

Long-term liabilities, such as mortgages and company loans, are financial obligations that must be repaid over a period of more than a year.

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Financial obligations that will be paid back within a year are referred to as short-term liabilities.

These are some of them:

  • Sales tax is normally due once a month or once a quarter.
  • Payroll taxes are taxes deducted from employees’ paychecks and paid to the government.
  • Payments on loans and mortgages are due on a monthly basis.

The following is a list of items that are classified as liabilities:

  • Accounts receivable (money you owe to suppliers)
  • Salaries that are due
  • Unpaid wages
  • Interest is due
  • Taxes to be paid
  • Taxes must be paid
  • Customer deposits or prepayments for goods or services that have not yet been delivered
  • Suits must be paid
  • Accounts receivable
  • Contracts that you can’t break without paying a penalty, such as a cell phone contract
  • A lease contract
  • Insurance premiums are due
  • Benefits to be paid
  • Investment-related taxes
  • Liabilities that have accrued (such as interest that hasn’t been billed by the lender)

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Small Business Common Liabilities

You have liabilities if you borrow instead of paying cash. Using a credit card to pay is also considered borrowing until the debt is paid off before the end of the month. A business loan or a mortgage on commercial real estate are both considered liabilities.

Only few states require businesses to collect sales tax. Rates are also different.

Importance Of Liabilities To Small Business

Liabilities (money owed) aren’t always a bad thing. Some loans are used to purchase new assets, such as tools or automobiles, that aid in the operation and growth of a small firm.

However, too much liability can be financially damaging to a small organisation. Debt-to-equity and debt-to-asset ratios should be monitored by business owners. Simply expressed, a company’s assets (financial assets) should be sufficient to pay off its debt.

Expenses VS. Liabilities

A liability is money owed to purchase an asset, such as a loan for new office equipment. Expenses are payments that are made on a regular basis for something that has no physical worth or for a service.

  • A monthly company mobile phone charge is an example of such expense. However, if you’re tied into a contract and must pay a cancellation fee to get out, the price will be listed as a liability.
  • Your store’s utilities are an outlay. Your store’s mortgage is a liability.

Expenses are also recorded in the income statement rather than the balance sheet. Both assertions are pecuniary in nature.

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