Types of Liability Accounts List of Examples Explanations Definition

This financial statement reports the amounts of assets, liabilities, and net assets as of a specified date. This financial statement is similar to the balance sheet issued by a company. A liability account that reports amounts received in advance of providing goods or services. When the goods or services are provided, this account balance is decreased and a revenue account is increased. The amount of a long-term asset’s cost that law firm chart of accounts has been allocated to Depreciation Expense since the time that the asset was acquired. Accumulated Depreciation is a long-term contra asset account (an asset account with a credit balance) that is reported on the balance sheet under the heading Property, Plant, and Equipment.

Rules of Debit and Credit

As a small business owner, you’re going to incur different types of liabilities as you operate. It might be as simple as your electric bill, rent for your office or other types of business purchases. Liabilities don’t have to be a scary thing, they’re just a normal part of doing business. Because chances are pretty high that you’re going to have some kind of debt.

The Impact of Liabilities on Financial Statements

Hence the revenues reported on the income statement were earned but the company may not have received the money from its customers. In order to understand how cash has changed, and because many believe that “cash is king” the cash flow statement should be distributed and read at the same time as the income statement and balance sheet. However, as of December 31 only one month of the insurance is used up. Hence the cost of the remaining five months is deferred to the balance sheet account Prepaid Insurance until it is moved to Insurance Expense during the months of January through May.

• This accrual-type adjusting entry was needed so that the December repairs would be reported as 1) part of the expenses on the December income statement, and 2) a liability on the December 31 balance sheet.
• Let’s look at a historical example using AT&T’s (T) 2020 balance sheet.
• However, the maximum amount of the credit balance is the cost of the asset(s).
• Other or nonoperating items include interest income, interest expense, and gains and losses on sale of assets used in the business, loss on lawsuit, etc.
• At that time they will be moved to an expense on the income statement.

Small business resources

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the liability accounts social studies of finance at the Hebrew University in Jerusalem. A bank time deposit (savings deposit) that cannot be withdrawn until a specified date.

Liabilities and equity are listed on the right side or bottom half of a balance sheet. Some loans are acquired to purchase new assets, like tools or vehicles that help a small business operate and grow. Companies of all sizes finance part of their ongoing long-term operations by issuing bonds that are essentially loans from each party that purchases the bonds. This line item is in constant flux as bonds are issued, mature, or called back by the issuer. The outstanding money that the restaurant owes to its wine supplier is considered a liability.

• Liabilities are classified into three categories – current, non-current, and contingent.
• Unearned revenue arises when a company sells goods or services to a customer who pays the company but doesn’t receive the goods or services.
• Contingent liabilities are potential obligations that may arise from future events.
• If both sides of this basic accounting equation are the same, then your book’s “balance” is correct.
• It is assumed that the decrease in the amount prepaid was the amount being used or expiring during the current accounting period.

Does the debit side of any account always increase when there is an entry on the credit side?

Here are a few metrics and key ratios that potential investors and management teams look at to perform a financial analysis. Here is a list of some of the most common examples of current liabilities. A company’s receipts that appear on the company’s records but do not yet appear on the bank statement. For example, a retail store’s receipts of March 31 are deposited after banking hours on March 31 or on the morning of April 1. Those receipts are in the company’s general ledger Cash account on March 31, but are not on the March 31 bank statement.

Avoiding Adjusting Entries

As you read the previous paragraph, you may have been reminded of our discussion of adjusting entries. That’s because the adjusting entries are part of each period’s closing process. The adjusting entries are prepared in order to report a company’s revenues and expenses in the proper accounting period. The changes in the noncurrent liabilities, stockholders’ (or owner’s) equity, and short-term loans are reported in the financing activities section of the cash flow statement. While the balance sheet and the income statement are the most frequently referenced financial statements, the statement of cash flows or cash flow statement is a very important financial statement.

Accruals

The accounting term that means an entry will be made on the left side of an account. Usually a person without a four-year or five-year accounting degree employed to record routine financial transactions for smaller companies. Accounting software is likely to include a feature for reconciling the bank statement. BuildingsThis account will report the cost of the building used in the business.

• A liability account in accounting represents the various financial obligations a company owes to others, recorded on its balance sheet.
• AP can include services, raw materials, office supplies, or any other categories of products and services where no promissory note is issued.
• Having a better understanding of liabilities in accounting can help you make informed decisions about how to spend money within your company or organization.
• As you continue to grow and expand your business, you’re likely going to take on more debt as you go.
• Liabilities and equity are listed on the right side or bottom half of a balance sheet.
• Again, credit means right side and our T-account showed credits on the right side.

Accrual of Expenses

Accounts payable is typically presented on the balance sheet as a separate line item under current liabilities. The balances in liability accounts are nearly always credit balances and will be reported on the balance sheet as either current liabilities or noncurrent (or long-term) liabilities. Under the accrual basis of accounting, the Service Revenues account reports the What is bookkeeping fees earned by a company during the time period indicated in the heading of the income statement.