Definition: A liability is a debt owed from one company to a person or company that is not an owner of business. In other words, liabilities are debts owed to non-owners or creditors.
What Does Liability Mean?
There are many different types of liabilities including accounts payable, payroll taxes payable, and bank notes. Basically, any money owed to an entity other than a company owner is listed on the balance sheet as a liability.
For instance, assume a retailer collects sales tax for every sale it makes during the month. The sales tax collected does not have to be remitted to the state until the 15th of the following month when the sales tax returns are due. If the company does not remit the sales tax at the end of the month, it would record a liability until the taxes are paid. The sales tax expense is considered a liability because the company owed the state the money.
Liabilities are split into two main categories on the balance sheet: current and long-term. Current liabilities consist of debts that will become due in the next year. They are listed first on the balance sheet to show investors and creditors how much the company will have to pay its current creditors in the upcoming year. Current liabilities usually include accounts payable, sales tax payable, payroll taxes payable, and accrued expenses.
Long-term liabilities consist of debts that have a due date greater than one year in the future. The most common long-term debts include bank notes and bonds. Long-term liabilities are listed after current liabilities on the balance sheet because they are less relevant to the current cash position of the company.
Portions of long-term liabilities can be listed as current liabilities on the balance sheet. Most often the portion of the long-term liability that will become due in the next year is listed as a current liability because it will have to be paid back in the next 12 months.