In plain English
Liabilities include payables, loans, credit cards, taxes owed and deferred revenue.
They appear on the balance sheet next to equity.
Why it matters
Liabilities are claims on your future cash. A business can look healthy on its profit report and still be stretched because of credit card balances, unpaid taxes and loans that all come due soon. Knowing the full list lets you judge whether taking on new debt or spending reserves is realistic.
When liabilities are missing from the books, such as a card that was never connected, the balance sheet overstates what the owners actually have.
Worked example
Payables $4,500 + loan $11,500 = liabilities of $16,000.
How to handle it
- List every loan, credit card, line of credit and tax account the business owes and make sure each has its own account in the books.
- Reconcile each liability to its statement at month end, the same way you reconcile the bank.
- Split loan payments between principal, which reduces the liability, and interest, which is an expense.
- Review the liabilities section of the balance sheet for anything with a negative balance and investigate it.
Common mistakes
- Booking a whole loan payment as an expense, which leaves the loan balance overstated forever.
- Never reconciling credit card accounts, so duplicate or missing charges go unnoticed.
- Putting a long-term loan entirely in a current liability account, which makes short-term ratios look worse than they are.
Not the same as: Expense
An expense is a cost used up in the period and it reduces profit. A liability is an amount still owed, and paying it reduces cash and the liability without necessarily touching profit. See Expense.
Go deeper
- How to Read a Small Business Balance Sheet: A guide to reading a balance sheet line by line: assets, liabilities, equity, what healthy looks like, and red flags that deserve a question.
- The Sales Tax Payable Account: Keeping It Accurate: How sales tax moves through your books, why it is a liability and not income, and how to reconcile it to your returns.
Try it
Related terms
- Materiality: The size at which an error or omission would change a reader's decisions.
- Net income: What is left of revenue after all expenses, including cost of goods sold and taxes where recorded.
- Journal entry: A manual accounting entry with equal debits and credits, used for items software does not create.
Common questions
What is a liability?
An amount the business owes to others.
Can you give an example of liability?
Payables $4,500 + loan $11,500 = liabilities of $16,000.
Is a credit card balance a liability even if I pay it in full each month?
Yes. Until the statement is paid, the balance is owed to the card issuer. Paying in full simply means the liability resets to zero after each payment.
What is the difference between current and long-term liabilities?
Current liabilities are due within roughly the next year, such as payables and the next twelve months of loan payments. Long-term liabilities are the portion due after that.
General information, not tax, legal or accounting advice. Confirm rules with the IRS, the NJ Division of Taxation or a licensed professional.