What Are Liabilities? Definition, Examples & How to Calculate
Learn what liabilities are in accounting, how to calculate them, and the difference between current and long-term liabilities. Explore common examples and understand how liabilities affect a company’s financial health.
What Are Liabilities?
Liabilities in accounting represent the financial obligations a business owes to others. These obligations arise from past transactions or events and require the company to transfer assets, provide services, or settle debts in the future.
Liabilities appear on the balance sheet and play a key role in showing how a business finances its operations, whether through borrowing, credit purchases, or other commitments.
Current liabilities are obligations due within one year, such as accounts payable, short-term loans, accrued expenses, or taxes owed. Long-term liabilities extend beyond one year and may include bank loans, bonds payable, or lease obligations.
Distinguishing between these categories helps assess the company’s liquidity and long-term financial stability.
Tracking liabilities accurately is essential for evaluating a business’s overall financial health, determining solvency, and understanding how much of its operations are funded through borrowed resources.
Current liabilities are obligations that must be paid within one year.
They include short-term debts such as accounts payable, accrued expenses, payroll liabilities, short-term loans, interest payable, and upcoming portions of long-term debt.
What Is Considered a Liability in Accounting
In accounting, a liability is any financial obligation a business owes to another party as a result of past transactions or events.
It represents a future sacrifice of economic resources, usually through the payment of cash, the transfer of goods or services, or the settlement of a debt.
Liabilities appear on the balance sheet and help show how much of a company’s operations are financed through borrowed funds or deferred payments.
Common liabilities include loans, accounts payable, taxes owed, wages payable, and lease obligations.
How to Calculate Liabilities in Accounting
Calculating liabilities involves identifying all debts and obligations owed by the business and adding them together. This includes both current liabilities (due within one year) and long-term liabilities (due after one year).
On the balance sheet, total liabilities are found by summing items such as accounts payable, loans, accrued expenses, taxes owed, and other outstanding obligations.
Here’s the formula:
Total Liabilities = Current Liabilities + Long-Term Liabilities.
What Are Examples of Liabilities in Accounting
Common examples of liabilities include accounts payable, wages payable, income taxes payable, short-term loans, credit card balances, long-term loans, lease obligations, and bonds payable.
These represent commitments the business must settle over time and help illustrate how much of the company’s operations are funded through borrowing or deferred payments.
