Glossary

Liabilities

Definition

Liabilities are present obligations of a business to transfer cash, goods or services because of past events. Typical liabilities are amounts owed to suppliers, bank loans, taxes payable, accrued wages and advances received from customers. They have a credit normal balance and sit on the right side of the balance sheet with equity.

How it works

Liabilities are classified as current when they are due within twelve months or the operating cycle (trade payables, VAT payable, the current portion of a loan) and non-current otherwise (long-term borrowings, lease liabilities, provisions for end-of-service benefits). The split drives liquidity ratios such as the current ratio.

A liability exists even before an invoice arrives: electricity used in December but billed in January is an accrued expense at year end. Cash received before delivery is also a liability, deferred revenue, until the goods or services are provided.

Example: recording a bank loan

A company borrows 50,000, repayable in five equal annual instalments. On the day the cash arrives it debits bank 50,000 and credits bank loans 50,000. At the balance sheet date 10,000 is shown as a current liability and 40,000 as non-current.

Example: recording a bank loan
Account	Debit	Credit
Bank	50,000
Bank loans		50,000

Related terms

Assets
Assets are resources a business controls as a result of past events and from which it expects future economic benefits, such as cash, receivables, inventory and equipment. They have a debit normal balance and appear first on the balance sheet.
Equity
Equity is the owners' residual interest in the assets of a business after deducting all its liabilities. It includes share capital, reserves and retained earnings and has a credit normal balance.
Accounts payable
Accounts payable are amounts the business owes suppliers for goods or services received. They are current liabilities and are tracked per supplier.
Accrued expense
An accrued expense is a cost incurred in the period but not yet invoiced or paid, such as wages earned by staff at month end or interest on a loan. It is recorded as an expense and a liability so the period carries its full cost.
Deferred revenue (unearned revenue)
Deferred revenue is cash received from customers before the business has delivered the goods or services. It is a liability until the obligation is fulfilled, then it is recognised as revenue, for example month by month over an annual subscription.
Current ratio
The current ratio is current assets divided by current liabilities. It measures whether a business can cover obligations due within a year from assets that turn into cash within a year; a ratio below 1 is a warning sign.

Guides

IFRS Financial Statements: How the Balance Sheet, Income Statement and Cash Flow Fit Together

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FAQ

Questions about Liabilities

Is a loan a liability or an expense?

The loan principal is a liability. Only the interest charged on it is an expense; repaying principal reduces the liability and cash without touching profit.

Is accounts payable a liability?

Yes. Accounts payable are amounts owed to suppliers for goods and services received on credit, and they are usually the largest current liability of a trading business.

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