What Are Liabilities in Accounting?

Like assets, liabilities can be either current or long-term.

Current Liabilities

Current liabilities are those that are due or expected to be paid within the next 12 months.

• Accounts payable: Inversely related to accounts receivable, accounts payable are amounts owed to vendors and suppliers.
• Accrued liabilities: Accrued liabilities represent amounts estimated at the end of the accounting period to be owed to various parties. Though the company has not yet been billed for these amounts, it is necessary to reserve the amounts as liabilities, as they are incurred in order to match revenues properly with expenses. Examples of accrued liabilities include accrued wages, interest payable, taxes payable, and deferred revenues.
• Current portion of long-term debt: This includes the portion of the company’s long-term debt that it expects to come due within the next 12 months.

Long-Term Liabilities

Long-term liabilities are those due or expected to be paid beyond the next 12 months.

• Accrued liabilities: Some amounts included as accrued liabilities (as described above) are included in long-term liabilities, to the extent that they are expected to become due beyond the next 12 months. Common examples of long-term accrued liabilities include reserves for contingencies, legal reserves, and deferred tax liabilities.
• Leases: Leases give a company the right to use the property of another company for a certain periodic payment paid over a prespecified amount of time.
  • Capital lease: A capital lease means that the risks and benefits of the property are substantially transferred to the lessee company. The lessee company’s statements will appear as if the property was purchased, debiting an asset account and crediting a lease liability account for the amount of the asset.
  • Operating lease: An operating lease is considered an arm’s length transaction in which the lessee is merely borrowing the use of the property while its substan­tial control and benefit continue to reside with the lessor. The lessee company accounts for this transaction by merely debiting lease expense for all lease payments—it does not record an asset or liability to reflect the lease asset.
• Pension benefit obligations: A pension is a payment made by a company to a retired employee and is usually a percentage of the employee’s former salary. As part of a pension, a company may also provide insurance and other benefits as well. A company that is obliged to provide pension benefits to its employees upon their retirement must periodically have an actuary determine the company’s updated projected pension obligation in present value terms. To the extent that the company’s projected obligation exceeds the amount that the company has contributed to or set aside for the plan, the company must record a liability for the remainder of this obligation that it has yet to fund.
• Contingent liabilities: Contingent liabilities are those obligations for which the company may eventually be obligated for some degree of liability. Contingent liabilities are resolved based on the outcome of a particular event, such as a lawsuit. To the extent that a contingent liability is both “probable” and “reasonably estimable,” the company must currently accrue its best estimate of this obligation as a liability and a corresponding expense on its financial statements. An example of a contingent liability would be a worker’s compensation claim for which the company has been sued. If the company determines both that it is probable that the company will lose the case and that some minimum liability in connection with an unfavorable verdict is reasonably estimable, the company must immediately record this liability.
• Notes payable: This includes long-term debts to customers, owners, vendors, employees, or others.
• Deferred tax liabilities: There are differences between GAAP and the Internal Revenue Service (IRS) tax code regarding the deductibility of certain amounts. As a result, a deferred tax liability (or asset) can result in a company’s GAAP financial statements representing amounts that the company has deducted for income tax purposes but has not yet deducted as an expense on its accounting statements.
  • Permanent differences: These are items that are recognized for tax reporting but not under GAAP, or that are reported for GAAP but not taxed. These differences will never be reconciled because, unlike a timing difference between GAAP and the IRS code, these amounts are recognized by one entity and not by the other. As a result, the company will continue to carry forward indefinitely the effect of these differences. Examples of permanent differences are political contributions and life insurance payments, which are deductible from accounting income but not from taxable income.
  • Temporary (timing) differences: Certain items are recognized at significantly different times for tax and GAAP reporting purposes. These differences are temporary and will eventually reconcile themselves. One type of temporary difference results from the differences between depreciable lives used for accounting and tax income. GAAP permits a company to use depreciable lives that it believes most accurately reflect the lives of its assets, whereas the tax code prescribes specific lives. However, by the time the assets are fully depreciated on both accounting and tax records, the amounts will have reconciled themselves.
• Long-term debt: This amount includes the company’s long-term debt, less the current portion included above.