What are Liabilities?

Published by Thomas Herold in Accounting, Corporate Finance

'Liabilities' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Where a business is concerned, liabilities prove to be amounts of money that are owed by the company at any given point. These liabilities are displayed on the firm’s balance sheet. They are commonly listed as items payable, or simply as payables.

There are two types of liabilities. These are longer term liabilities and shorter term liabilities. Long term liabilities turn out to be business obligations that last for greater than the period of a single year. Mortgages payable and loans payable are included in this category.

Short term liabilities represent business obligations that will be paid in less than a year. There are many different kinds of short term liabilities. They include all of the items detailed below.

Payroll taxes payable are one of these. They represent sums automatically collected from the employees and put to the side by the employer. They have to be given to the IRS and any state taxing agencies at the pre determined time.

Sales taxes payable are another short term liability. The business collects them from its customers when sales are made. They hold them until it is time to give them to the proper revenue collecting department within the state.

Mortgages and loans payable are another short term liability. These represent payments made every month on mortgages and loans. They are not large single payments or the total amount of a loan that is eventually owed, but instead represent recurring monthly obligations.

Liabilities for individuals are another type of liabilities altogether. They also represent money that has to be paid out. For people, they are debts owed, as well as monthly cash flow that goes out of the individual’s accounts.

Liabilities and assets are the opposites of each other, yet people often get them confused. While assets are things that contribute positive cash flow to a person’s finances, liabilities are those that create negative cash flow, or money that leaves an individual’s accounts every month. For example, a house that an individual owes money on and makes monthly payments on is a liability, not an asset. The house takes money from the person in the form of monthly mortgage payments each month. For a house to be an asset, it would have to be completely paid off. Even still, if monthly taxes and insurance payments are being made, then technically it would still be a liability. Houses can only be assets really and truly when they are rented out and the rental income that a person receives is greater than all of the expenses associated with the house every month, including any mortgage payments, taxes, insurance, upkeep, and property management fees. When the net result of a property is money coming in, then it is an asset and not a liability.

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The term 'Liabilities' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.