Business liabilities are best defined as the financial obligations or responsibilities of a business. Liabilities should not be construed as a negative. Rather, they are a necessary obligation that proves essential to the company’s progression. In short, liability is almost always necessary for a business to excel. So don’t misconstrue business liabilities with legal liabilities. Legal liabilities have negative connotations while business liabilities should be thought of in a more positive light. Let's take a closer look at what business liabilities are all about.
Business Liability Examples
In the context of business, liabilities are financial. Business liabilities are amounts paid for services to be provided or money owed to creditors who lent money in the past. Bookkeepers typically list the money owed in categories qualified as being "payable." Such categories include accounts payable, wages payable, notes payable, interest payable, and income taxes payable. Deposits for work to be done at the business, prepayments to service providers, and unearned amounts are also considered liabilities. In short, business liabilities are best thought of as financial obligations the business is required to pay. The bottom line is unless your business strictly deals in cash, it will have business liabilities in the present and also in the future.
A Closer Look at Business Liabilities
When something is purchased for a business, it is bought either with a credit card, cash, or check. If the good or service is not paid for with cash, the person buying the item on behalf of the business is creating a business liability. The business has to borrow funds to buy the item, meaning liability is created along with a claim on the assets by the creditors who lent the money that will eventually need to be repaid with cash. This means the simple act of purchasing office supplies with the company credit card creates a business liability.
However, this liability is eliminated when the debt is paid in full, possibly before the point at which it accumulates interest. In other words, using the business liability of a credit card to purchase items for your business is beneficial to your company in that it enhances your credit rating and also helps rack up those credit card reward points.
Business liabilities extend well beyond paying for items and services with a credit card. Business liabilities also extend to money owed to employees for their hard work. Even collecting sales tax from clients after providing a service or product qualifies as business liability. As long as the business monitors the number and extent of liabilities, there is the potential for those liabilities to be a significant boon. However, if the business becomes overextended or simply loses track of liabilities, it can backfire in the form of penalties, fractured relationships with parties owed money, and an abundance of information that proves difficult to keep track of.
Business Liabilities on Paper
Companies use balance sheets to display business liabilities. Balance sheets are financial statements that detail a company’s financial situation when an accounting period comes to a close. The business liabilities along with owner equity are displayed on the right side of the balance sheet while the business assets are displayed on the left. The liabilities are usually shown above the owner equity as it is given priority should the business go bankrupt.
Business Liability Types
There are two primary business liabilities in the long term and short-term. Short-term business liabilities are the company’s financial obligations that are likely to be satisfied within the next year. These short-term liabilities are usually stated before long-term liabilities on the balance sheet. Short-term liabilities, sometimes referred to as current liabilities, include sales tax payable, meaning money collected from clients at the point services or products were rendered. Payroll taxes payable collected from workers through withholdings are also short-term business liabilities. Loans and mortgages payable along with unearned revenue received before the rendering of a service or good also fall under the umbrella of business liabilities.
Long-term business liabilities are the business’s obligations that are likely to remain for longer than a year. As an example, bonds payable are a long-term business liability. Leases that last longer than a year are a long-term liability. The portion of a mortgage or loan that is due beyond the year ahead is also viewed as a long-term liability.
Business Liability Analysis
Business liabilities are useful to the extent that they are analyzed and ultimately fulfilled to improve the business. Companies often compare the debt level carried with liquidity as well as solvency measures to gauge if there is an excessive liability. Financial specialists sometimes focus on the current ratio that helps companies gauge whether short-term financial obligations can be paid while still meeting cash needs considering business liabilities and assets.
In short, business liabilities are an important piece of a business’s overarching financial puzzle. These liabilities are dynamic rather than static. This means business liabilities are constantly changing as debts are paid, invoices are satisfied and the business continues to grow. Keep your finger on your company’s metaphorical financial pulse by analyzing business liabilities as time progresses and you will have that much more of a clearer picture of your business’s true financial state.