What is a Liability?

A liability is a present obligation of an entity to transfer assets or provide services to another party as a result of a past transaction or event. It usually arises from borrowing, purchasing goods or services on credit, accruing expenses, collecting advance payments, or incurring legal obligations. Liabilities are reported on the balance sheet and are commonly classified as current or long-term, depending on when settlement is expected. Examples include accounts payable, accrued wages, taxes payable, loans, bonds, lease obligations, and warranty obligations. Proper liability recognition ensures that financial statements fairly present obligations, liquidity, leverage, and future cash commitments.

Examples of Liabilities

Examples of both current and long-term liabilities are as follows:

Current Liabilities

Accounts payable. Amounts owed to suppliers for goods and services received.
Short-term notes payable. Loans or notes that must be repaid within a year.
Accrued expenses. Expenses incurred but not yet paid, such as salaries, rent, or utilities.
Unearned revenue. Payments received before goods or services are delivered.
Taxes payable. Income, sales, or property taxes owed to the government.
Dividends payable. Declared dividends that are yet to be paid to shareholders.
Current portion of long-term debt. The portion of long-term liabilities due within the next year.

Non-Current Liabilities

Long-term debt. Loans or bonds payable due after one year.
Deferred tax liabilities. Taxes due in the future arising from timing differences in accounting.
Lease liabilities. Long-term obligations under lease agreements.
Pension obligations. Future pension payments owed to employees.
Contingent liabilities. Potential liabilities that are dependent on the outcome of future events, such as lawsuits or environmental remediation.

Accounting for Liabilities

For all of these sample liabilities, a company records a credit balance in a liability account. There may be rare cases where there is a negative liability (essentially an asset or a decline in a liability), in which case there may be a debit balance in a liability account. The basic accounting for liabilities is to credit a liability account. The offsetting debit can be to a variety of accounts. For example:

Accounts payable. The offsetting debit may be to an expense account, if the item being purchased is consumed within the current accounting period. Alternatively, the offsetting debit may be to an asset account, if the item is to be used over several periods (as is the case with a fixed asset).
Accrued liabilities. The offsetting debit is nearly always to an expense account, since accrued liabilities are usually only recognized as part of the closing process, where there is an expense but no documentation in the form of a supplier invoice.
Accrued wages. The offsetting debit is to the wage expense account, and reflects earned but unpaid hours at the end of the reporting period.
Deferred revenue. The offsetting debit is usually either the cash account or the accounts receivable account, and reflects a situation where a customer has at least been billed for services rendered or goods shipped, but the revenue creation process is not yet complete. A variation on this concept is a customer prepayments account, or a customer deposits account.
Interest payable. The offsetting debit is to the interest expense account, and indicates the amount of interest expense accrued by a business, but not yet billed to it by a lender.
Sales taxes payable. The offsetting debit is the accounts receivable account, which is where the sales tax billing to the customer is located.

In short, there is a diversity of treatment for the debit side of liability accounting.

Presentation of Liabilities

When presenting liabilities on the balance sheet, they must be classified as either current liabilities or long-term liabilities. A liability is classified as a current liability if it is expected to be settled within one year. All other liabilities are classified as long-term. Accounts payable, accrued liabilities, and taxes payable are usually classified as current liabilities. If a portion of a long-term debt is payable within the next year, that portion is classified as a current liability. Most liabilities are classified as current liabilities.

Liability Accounting FAQs

How are contingent liabilities accounted for?

Contingent liabilities are recorded in the accounts if the obligation is probable and the amount can be reasonably estimated. If the obligation is only possible but not probable, it is disclosed in the notes to the financial statements without recognition. Remote contingencies are neither recorded nor disclosed, since the likelihood of payment is very low.

Accounting for Contingencies

Examples of Liabilities

How to Handle Disputed Liabilities

The Difference Between Assets and Liabilities

The Difference Between Liability and Debt