What are business liabilities?

Business liabilities is a term to describe the debts that a company owes to someone or something else. There are various types of business liabilities and we’ve decided to explain them all in this handy article.

What are examples of business liabilities?

There are lots of examples of business liabilities, and these include:

  • Bank debt
  • Mortgage debt
  • Money owed to suppliers
  • Wages owed
  • Taxes owed

Generally, business liabilities fall under three categories: short-term liabilities, long-term liabilities, and contingent liabilities.

Short-term business liabilities

Short-term liabilities are due within a year or on a normal operating cycle, such as accounts payable. As there is a need for them to be paid quickly, it’s important to keep an eye on short-term liabilities and ensure there is enough liquidity in the company so they can be paid in time.

There are various types of short-term liabilities, including:

  • Accounts payable – debts owed to vendors, utilities and suppliers that have been purchased on Net terms or on credit
  • Principle and interest payable – This is any payment due towards the payment of a mortgage or loan
  • Short-term loans
  • Taxes payable
  • Accrued expenses – any expenses that have built up and are due to be paid within a year
  • Unearned revenue – money that has been earned in advance of goods or services

Long-term business liabilities

Also referred to as non-current liabilities, long-term liabilities are due in more than 12 months’ time.

Examples of long-term liabilities include:

  • Long-term notes payable – this is similar to accounts payable but the length of terms for the payment are longer than 12 months
  • Deferred taxes – any taxes where payment of them is deferred for more than a year
  • Bonds payable – bonds are issued by various organisation and interest on them is usually paid every six months or annually
  • Mortgage payable – whilst the monthly principal and interest on a mortgage are considered short term liabilities, the mortgage itself is considering a long-term one
  • Capital leases – capital leases are defined as the costs to lease any equipment

Contingent liabilities

Contingent business liabilities are far less common than short-term and long-term ones, but they do pop up from time to time. The two most common types are lawsuits and product warranties. However, they are more like potential liabilities as they are recorded depending on the outcome of a future event.

For example, if a £50,000 lawsuit is filed against a company and the probability of losing the lawsuit is higher than 50%, this will be recorded as a contingent liability. However, if the company wins the lawsuit or it is dropped, then the company would no longer be liable for £50,000.

No matter the size of your company and the sector you operate in, proper management of your business liabilities is essential for ensuring you spend within your means and do not occur any additional debt.