The Basic Accounts – A Look at Liabilities
Every dime your business owes, no matter to whom or for what reason, is a liability. Owing someone a product (such as a magazine subscription) or a service (such as insurance coverage) counts as a liability as well.
Although there aren’t as many kinds of liabilities as there are assets, liabilities also get broken out into groups. In your accounts you will have cur- rent liabilities and long-term liabilities. What differentiates them is when you have to pay them: Anything due within one year counts as current, and any debts that stretch further out than one year go into the long-term group. In most cases, current liabilities tend to be created through daily business activities (like purchasing inventory), and long-term liabilities tend to be loans.
For product-based companies, the biggest chunks of liabilities are usually the same: the business loan and the accounts payable. Service businesses tend to have the least debt, since they usually cost less to start up and don’t have to maintain stocks of inventory. Service company debts often tend to be in the form of work for which a customer has paid in advance; a good example of this is lawyers who work on retainer. These liabilities often have names such as “unearned revenue” and virtually always belong in the current liabilities category.
When you look at a list of accounts, you will notice that most liability accounts have the word “payable” in their name. The rest of the name helps you determine just what that liability is payable for, such as sales tax payable or loan payable. The most unspecific name is accounts payable, which acts as a holding account for all the money you owe to all of your vendors in one big lump.