What are liabilities?

Liabilities are debts or obligations that arise as a business operates. They are created, for instance, when a business buys goods without paying for them immediately, but agrees to pay in 1 month’s time.

Eventually settled or paid in cash, they are important in a business because very often, the business’ cash is tied up in assets that are not liquid.

Want to read about "Assets? Go here.

Under such circumstances, the business will be unable to pay its suppliers/creditors immediately – so being able to owe the suppliers for short period of time will give some breathing space.

As assets are on the left side of the accounting equation, they are located on the right side.

For more on the Accounting Equation, go here.

Examples are:

Accounts payable, sometimes known as trade creditors, are repayable in the short-term, and usually arise when a business owes payment when purchasing trade goods or services. As they are short-term, they are repayable within 1 year (usually within 30 days).

Loans are usually outstanding for the long-term, which means they are mostly repayable in more than one year. Loans are usually taken from banks or financial institutions, and can be for long periods. Loans can be secured or unsecured.

Secured loans refer to loans that are backed by collateral assets. In other words, in the event that such secured loans cannot be repaid, the assets to which the loans are attached can be sold to repay the outstanding amount. This gives extra security to the lender.

Unsecured loans are loans which are not backed by collateral assets.

Deferred revenues or unearned revenues refer to cash received in advance for goods/services that have not yet been delivered. In other words, goods/services are still owing to the customer, and will be fulfilled at a later date. Under such circumstances, the advance cash received is considered a liability.

Accrued expenses are expenses that are payable in the short-term, usually relating to operations, such as salaries/wages, rent and utilities.

Return to Accounting Terms from Liabilities
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