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Your Guide to Liability Accounts


There are lots of different types of liability accounts to keep in mind. Pretty much every business deals with liabilities. Liability is all about being legally responsible for something.


The commonly accepted definition is that liabilities represent debt in most cases for businesses. Companies often look for third-party funds to continue their operations. This means that the creditor may retain the right to either make the business sell assets to repair a loan or confiscate the assets.


Regarding liability accounts they are recorded on the right side of the balance sheet for the borrowing company. They represent the creditor's claim to the borrower's capital if the debts are not paid on time.


These types of debts can be settled in a wide range of ways.


Typically, it’s through goods, money, or services. The total amount of liabilities that a company can have can only be equal to the total amount of assets and equity that they have.


Different Types of Liability


It’s understood that there are two different types of liability. You have current and non-current liabilities. A current liability is any liability that is expected to be paid back within a year or the standard operating cycle for the business, whichever is the longer of the two. This type of liability is known explicitly as a short-term liability.


The other type of liability is a non-current liability. This covers a more extended period than a short-term liability, and the borrower has more than a year to settle the debt. This type of debt is known more specifically as a fixed or long-term liability.


Types of Current Liability


There are multiple types of current liability to keep in mind. Let’s take a look at them.


● An overdraft is where the business borrows from the bank by overdrawing the account. Therefore, it withdraws more than the account's value, and has to repay the difference to the bank itself.


● Accounts payable is where a business buys products on an account which they need to pay back.


● Taxes payable are all about the collection of sales tax or employee deductions.


● Salaries payable are the salaries which the company currently owes to workers that haven’t been paid yet.


● Accrued expenses are when a business accounts for expenses it’ll pay off later.


● Customer prepayments is money paid by your customers that you’ll owe later.


● Interest payable is any interest accrued on loans which hasn’t yet been paid.


● Current portion of long term debt is any debt with a maturity over a year but with a percentage due in the next 12 months.


● Unearned revenue is anything where a customer is promised goods and hasn’t received them yet despite paying.


Types of Fixed Liabilities


There are plenty of types of fixed liabilities to consider too:


● The mortgage is taken to finance new business operations.


● An equipment loan is for vehicles or equipment and is repaid over several years.


● Notes payable is for any debt or equity securities the company has.


● Deferred tax liabilities are for when income differences from what’s on the tax return.


● Pension obligations are monies accounted for in the long term.


● Other long term debt is any borrowing with more than 12 months maturity.


If you need support with either of these liabilities or contingent liability, choose Probookkeeper for all your services.

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