accounting principles

1. Ori Practical Accounting Training
Liability Accounts

2. What is a Liability Account? – Definition
• Liabilities are defined as debts owed to other companies.
• In a sense, a liability is a creditor’s claim on a company’
assets.
• In other words, the creditor has the right to confiscate assets
from a company if the company doesn’t pay it debts

3. What is a Liability Account? – Definition
• Debt financing is often used to fund operations or expansions. These
debts usually arise from business transactions like purchases of goods
and services,
• Liability accounts have a credit balance. This means that entries
created on the left side (debit entries) of a liability T-account decrease
the liability account balance while journal entries created on the right
side (credit entries) increase the account balance

4. Types of Liability Accounts – Examples
• There are many different kinds of liability accounts, although
most accounting systems groups these accounts into two main
categories: current and non-current.
• Current liabilities are debts that become due within the year,
• while non-current liabilities are debts that become due greater
than one year in the future

5. Current Liabilities
• Accounts Payable – Many companies purchase inventory on credit
from vendors or supplies. When the supplier delivers the inventory,
the company usually has 30 days to pay for it
• Accrued Expenses – Since accounting periods rarely fall directly after
an expense period, companies often incur expenses but don’t pay
them until the next period. These expenses are called accrued
liabilities. Take utilities for example

6. Non-current Liabilities
• Bonds Payable – Many companies choose to issue bonds to the public in
order to finance future growth. Bonds are essentially contracts to pay the
bondholders the face amount plus interest on the maturity date. Bonds are
almost always long-term liabilities.
• Notes Payable – A note payable is a long-term contract to borrow money
from a creditor. The most common notes payable are mortgages and
personal notes.
• Unearned Revenue – Unearned revenue is slightly different from other
liabilities because it doesn’t involve direct borrowing.
• Unearned revenue arises when a company sells goods or services to a
customer who pays the company but doesn’t receive the goods or services.
In effect, this customer paid in advance for is purchase.
• The company must recognize a liability because it owes the customer for
the goods or services the customer paid for.