Types of Liability Accounts
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Liabilities, or debts, are money you owe that reduces your net worth. As a business owner, you must track them, but did you know different types of liability accounts exist?
Understanding the differences can ensure your bookkeeping is accurate and make tax time easier too. There are two basic types of liabilities – current and fixed.
Current liabilities occur within the next year and may include the following:
- Accounts payable – Bills you owe to vendors and creditors
- Taxes payable – Any sales or employment taxes you owe for the year
- Salaries payable – Any salaries you owe but have not paid to employees yet
- Prepayments – If you accept customer prepayments and owe the service or product still, it’s a liability
- Interest payable – Any accrued interest on loans you haven’t paid yet
- Overdraft fees – Any fees you incur for going over your bank account balance
- Long-term debt due within 12 months – Any portion of the long-term debt you must pay within the next year
Fixed liabilities are long-term debt, debts you have over 12 months to pay. These differ for every business, but here are some common examples.
- Mortgage – The loan you borrow to pay for a building or place of business
- Equipment loans – The money you borrow to pay for equipment or cars to run the business
- Deferred tax liabilities – Tax liabilities you deferred using various techniques but still owe
- Pension funds – Money you must set aside to pay a promised pension
- Notes payable – Any debts owed that are longer than 12 months
You may also have contingent liabilities. These are liabilities that the cost can be estimated, and the outcome is somewhat predicted.
Liabilities aren’t a bad thing. Yes, they are money you owe, but you wouldn’t have a business to run without them. You must borrow money to have the capital to run a business, and you eventually need employees to help you run it.
Understanding liabilities and how to manage them is the key to running a successful business. It allows you to manage your money properly and have a successful business.