Learning Outcomes
- Define liabilities
Liability is the accounting term for debt. Like assets, liabilities are categorized as current and noncurrent.
[latex]\text{Liabilities}=\text{Debt}[/latex]
Liability Subcategories
There are a wide variety of items that can be liabilities, and many accounts are unique to a specific company, but the following categories give you the flavor of current and noncurrent liabilities.
Current Liabilities
Here are some common current liabilities:
- Accounts Payable (owed to vendors, e.g. companies from which we buy inventory)
- Trade Accounts Payable (another term for Accounts Payable)
- Wages Payable (wages we owe to our employees for work they’ve done but for which they haven’t been paid yet)
- Taxes Payable (taxes we owe that we haven’t paid yet)
- Short-term loans (like lines of credit that are paid back monthly)
- Current Portion of Long-Term Debt (the principal balance on long-term debt that is due within the next twelve months)
Noncurrent Liabilities
Here are some common noncurrent liabilities:
- Notes Payable (long term debt, less the Current Portion that is due within the next year)
- Bond Payable (another form of long-term debt)
- Leases Payable (long-term portion only—the current portion is reported as a current liability)
In common (non-accounting) usage, a liability is something for which you are responsible. Sometimes that term is also used to indicate a burden, or even an embarrassment, as in, “He had become a political liability.” However, in accounting, it really just means a debt or something you owe, and it’s always expressed in money.
Check your understanding of liabilities, and then we’ll move on to define owner’s equity.
Practice Question