Types of Liabilities You Don't Want to Forget on Your Balance Sheet

Two Categories of Liabilities: Current and Long-Term

To get a better view of your current and long-term liabilities, you can always create a classified balance sheet that breaks down your different liabilities.

Current Liabilities

Liabilities due within an operating cycle of the company. For most, one operating cycle is one year.

Long-Term Liabilities

Liabilities due more than one operating cycle of the company. These are items like mortgages on buildings, vehicle or equipment loans and loans from purchasing the business.

General Ledger Liability Accounts:

Notes Payable

This is when a company records the amount on a promissory note issues. For example, money you owe a bank or lender is considered a notes payable. In some cases, it could also be a large-purchase transaction. These can be current or long-term liabilities depending on the terms of the loan.

Accounts Payable

This account shows the amount your company owes another that was purchased on credit. As cash pays off your accounts payable, this liability decreases and thereby, equity decreases. There are many subsidiary accounts under accounts payable such as Wages Payable, Salaries Payable, Interest Payable, and others with similar concepts.

Accounts Receivable

Your accounts receivable is essentially the opposite of Accounts Payable; this is the amount owed to you by another company on credit. For example, if you perform a service for a client, the funds you are owed are considered accounts receivable until you receive the cash. Then on your balance sheet, your Accounts Receivable liability will go down, and equity will rise because of the cash received.

Warranty Liability

If you often buy equipment or have equipment in need of repair, you will also have a warranty liability account on your balance sheet. This account is an estimate of how much your company will have to spend to replace to repair a product during the warranty period. This is considered a contingent liability, meaning it's a potential liability that may not become a liability depending on future events.

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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at info@practicalaccountingva.com.

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