What is a liability?

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No matter the type of career they desire, students interested in earning an accounting degree online need to develop a strong grasp of basic accounting principles and practices. With a stable foundation of knowledge, students can pursue a wide variety of careers. They can also seek out additional educational opportunities and valuable professional certifications, such as Certified Public Accountant and Certified Management Accountant.

An accountant discussing a potential liability issue.

Liabilities are one of the most central concepts to understand in the world of accounting. They are intrinsic to the most basic accounting needs as well as complicated review and compliance projects. Let’s look at what a liability is, why it’s so important to the basic principles of accounting, how accountants successfully balance assets and liabilities, and examples of liabilities in accounting.

What is liability?

In accounting, a liability can be looked at as a foregone conclusion, an obligation to make a payment or otherwise surrender resources based on past decisions of an individual or business and the other associated entities. A current liability exists in the present and there is a general expectation that resources, whether money or something else, will be used to address the obligation. Accounting Coach defines this concept as an obligation arising from a past business event, and noted that it is reported on a company’s balance sheet in all cases. Balance sheet liabilities may be paid back in a few days or over the course of several months or even years, but they eventually require the loss of some form of resource.

There are many ways to contextualize the basic concept of a liability. In personal finance, a car or home loan from a financial institution that must be paid back over time is an example of a liability. Another example would be a case where an individual has received some kind of benefit in an agreement with another entity, and has to make good on their part of the deal. For businesses, loans are a similar example of a liability, whether it’s tied to real estate, equipment, or something else. There are many other operational examples, such as accounts payable, payroll for employees, income taxes, and interest payments.

Current and long-term liabilities in accounting

There are two basic types of liabilities to consider, business library MaRS points out. Current liabilities are debts and other obligations that will be paid within 12 months, and are listed on the current balance sheet. These may include loan payments, wages and salaries, a variety of accounts payable obligations, and plenty of others.

Long-term liabilities, meanwhile, are expected to come due more than 12 months into the future. These can include the long-term portion of loans and bonds payable, as Investopedia points out, mortgages, and pensions, among many others. Essentially, a liability that exists but isn’t expected to come due in the company’s current business cycle falls into the long-term category.

A third category is contingent liabilities, which don’t currently exist but could materialize based on the outcome of some future event. The Corporate Finance Institute provided the example of a pending lawsuit against a business involving financial damages should the company lose. Accountants record this liability only if the amount involved can be reasonably estimated and the outcome is likely.

The role of liabilities on balance sheets

The balance sheet is a fundamental accounting tool. It allows business stakeholders, from executives to investors, to track performance from a financial perspective, understand current assets and liabilities, make determinations about shareholder equity, and more. Assets are listed on the left side of balance sheets, representing holdings, money, and other resources a company owns. Liabilities as well as shareholder equity are listed on the right side, representing the debts and issuances of shareholder equity used to pay for those assets, as Investopedia explains.

Balance sheets provide a valuable snapshot of a company’s operations at a specific point in time, and can help compare them with past operations. Liabilities are at the core of this process, filling a crucial role in assembling the balance sheet.

Understanding major liabilities

Businesses in the modern economy face a variety of liabilities in all phases, from initial startup to growth and expansion. Liabilities can vary significantly from one company to the next. One of the largest liabilities for a construction company may be the heavy machinery it uses to complete a wide variety of tasks. However, that company would have major liabilities tied to purchasing its inventory. Depending on its location and the need to operate in a high-traffic location, it may also have much more significant liabilities in real estate than a construction business, which may be able to locate its facilities on an inexpensive piece of land. These many differences in liabilities span the economy. Common liabilities exist for nearly all businesses, such as payroll and accounts payable, but even those may be related to a relatively small obligation or account for a majority of all liabilities.

Starting your accounting path with the University of Alabama at Birmingham

Accounting professionals enjoy a wide variety of different potential career paths, from general occupations like tax accountant to much more specialized roles, such as forensic accounting. No matter which type of initial position or overall career plan interests you, earning your accounting degree online is an especially flexible and effective way to get started. The Bachelor of Science in Accounting education you receive online with the University of Alabama at Birmingham is the same high-quality instruction provided on campus, including opportunities for group projects and network building. However, it’s also a flexible option that allows you to complete coursework at your own pace and makes it easier to balance existing personal and professional responsibilities. To learn more, get in touch with an academic advisor today.

Recommended Reading:

Careers you can pursue with a Bachelor of Science in Accounting

What is cost allocation?

Sources:

UAB Collat School of Business: Bachelor of Science in Accounting

UAB Collat School of Business: Course Descriptions BACC

Corporate Finance Institute: What Are the Main Types of Liabilities?

Investopedia: Liability

Investopedia: Balance Sheet

Investopedia: Long-Term Liabilities

MaRS: Current liabilities and long-term liabilities on the balance sheet

Accounting Coach: What is a Liability?