In the fewest possible words, a liability is a debt. “Debt” refers to more than just money, however. It can be an obligation, a tax, a contribution, a responsibility – you get the picture. Liabilities come in a variety of shapes and sizes. Current liabilities, the topic of this post, are simply liabilities that are due within 12 months.
Liabilities apply primarily to companies and individuals and these are our two main points of interest. Below you will find lists (with explanations as necessary) of current liabilities examples for companies and individuals. Round out your bookkeeping knowledge with this excellent introduction to financial accounting program.
Current Liabilities For Individuals
Let’s start with the personal stuff. I want to explain the first example or two just so that we understand why these items are current liabilities:
- Income Tax And Interest (unpaid): Many people pay estimated income taxes or have their taxes automatically withheld from their wages. Income tax and any other taxes that must be paid in full within one year qualify as current liabilities. If you have an on-going interest fee that you have to pay off over several years, only the portion that is due within 12 months is considered a current liability; the remainder is simply “liability.”
- Home Mortgage: Again, a home mortgage might be paid off over several decades, but only the amount that is due within one year is considered a current liability. This will apply to many of the following liabilities.
- Car Loans: All interest and principal due within one year.
- Credit Card Balance
- Other Lines Of Credit
- Utilities (rent, gas, electricity, water, etc.): Signature example of current liabilities, as payments are almost always due monthly.
- Student Loans: Student loans are often deferred until the student completes his or her education; even then a grace period of six to nine months is common. A student loan might be a liability for four and a half years (the duration of a college education, plus the six month grace period) before it becomes a truly current liability.
- Personal Loans
- Home Equity Loans
- Miscellaneous Debts And Mortgages (legal, medical, etc.)
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Current Liabilities For Companies
Companies tend to have far, far more current liabilities than individuals (or, at least, they have more options available). The first liabilities we’re going to look at are just your standard, run-of-the-mill liabilities. You’ll notice that some of these, such as taxes and interest and loans, overlap with individual current liabilities.
- Accounts Payable: This refers to all the money you own to partners, suppliers, etc. For example, if you owned a dairy farm, you would have accounts payable to the companies that provide feed, hay, vaccines, etc. It is common for various agreements to be reached between suppliers and their clients. Depending on the frequency of supplying, payment may be due once a month, once every three months, once every six months, etc. It might seem like it would be in the company’s best interest to pay invoices immediately (and thereby avoid having Accounts Payable), but the opposite is true. Companies want to have liabilities because it allows them to hold onto their money for as long as possible. Needless to say, the suppliers are anxious to get paid so there are always rules, interest plans, etc. This line of thinking is similar to an individual who invests his or her money and decides to file for an income tax extension; yes, the individual will have to pay a small percentage of interest penalty on that money (roughly 0.5% or less), but think about how much money the individual will make by investing that capital for another six to nine months before paying taxes on it (i.e. a heck of a lot more than 0.5%).
- Loans (bank or other): There’s a lot more to loans than just principal and interest. Check out this business finance course on understanding business loans, debt, credit, bankruptcy and light accounting to learn how to start managing your own finances.
- Income Taxes And Interest Payable: Again, these are taxes and interest owed to the government and lenders that have not yet been paid.
- Dividends Payable: This is where we start to get into liabilities unique to companies. A dividend payable is an amount to be paid to shareholders (as determined by the board of directors).
- Current Payments/Maturities Of Long-Term Debt: This is another name for unpaid debts or loans. It works the same as it did for the individual: you might be paying a loan off over 10 years, but the portion that is due within twelve months is current.
- Accrued Expenses: These differ from accounts payable in that they are due to a third party at a predetermined date. The obvious example is employee wages, but we’ll get into payroll liabilities in more detail in our next section.
- Accrued Interest: Self-explanatory (see Accrued Expenses).
- Notes: With notes, you just have the immediate principal that is a current liability.
- Short-Term Notes: When the note is short-term, the entirety of the loan is due within the next year.
- Payroll Taxes: Usually these are withheld as they are paid. They can be directly or indirectly related to employee payroll.
- Overdrafts: This is an interesting example only because it is seemingly so trivial. Literally, the very short-term loans banks supply for overdrafts are current liabilities. Bookkeeping for a large company is no easy task, even with the help of accounting and bookkeeping software. If you want to learn how to use this software, do it the right way with the best DIY accounting software available through this acclaimed Learn QuickBooks Pro 2014 course.
- Deposits Or Other Unearned Revenue: Many times a customer or client will make a payment ahead of time (in other words, for work or products not yet delivered). In this case, the liability is not strictly financial. The debt here is one of services or products. If you were paid in advance to build a house in three months, then the house is literally your current liability (though it is still represented by the monies received).
- Utilities (generally similar for individuals and businesses)
- Rental Fees: While individuals can also have rental fees, they are commonly considered a business liability. The rent can be on a building or store, land, vehicles, equipment, pasture (in the case of a farm), etc.
- Sales Tax And Other: Any tax collected by a company, especially the sales tax connected to every transaction, is a current liability.
Accrued liabilities are just like they sound: they are liabilities that do not yet appear on the accounts payable. In other words, a good or service has been received but it has neither been invoiced, recorded nor paid. If we use the payroll example above, an employee who works two weeks before getting paid accrues those wages. Accrued liabilities are often routine (that is, recurring, such as employee wages), but they can also be non-routine or one-time liabilities, as well. I mentioned accrued expenses above, but let’s look at a few of the common examples:
- Federal Taxes
- State Taxes
- Local Taxes
- All income taxes
- All real estate and property taxes
- Employee Benefits and Pensions (Social Security, Medicare, Unemployment, etc.)
- Services not yet billed
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At this point we should almost be able to figure this out ourselves. Payroll liabilities are mostly accrued, as you will see below. The sheer number of possible payroll liabilities should put in perspective the legal hurdles every company must clear simply by having employees.
- Virtually all employee benefits quality as liabilities: This includes health insurance, life insurance, medicare and pretty much anything else that can be considered a benefit.
- All salaries and wages
- All taxes: The list of taxes is quite long and includes but is not limited to Federal income tax, state income tax, local income tax, and taxes paid on a variety of contributions.
- FICA (withheld) as well as FICA contributions that have not yet been paid.
- All garnishments withheld
- Federal Unemployment
- State Unemployment
- Worker’s Comp
- IRA Contributions
- 401(k) Contributions
At this point, you might consider some further reading on other concepts. This post on an introduction to finance reviews all the big ideas in management, accounting and markets.
Understanding Business Through Accounting
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