Types of Liabilities: Study with Video Lessons, Practice Problems & Examples

Current liabilities are obligations due within one year, including accounts payable, accrued expenses, unearned revenues, payroll liabilities, and current maturities of long-term debt. Accounts payable represents amounts owed to suppliers, while accrued expenses arise from adjusting entries, such as salaries payable. Unearned revenues occur when customers pay in advance for services not yet rendered. Long-term liabilities, payable beyond one year, typically include notes payable and bonds payable, which involve borrowing money with interest from banks or multiple lenders, respectively.

Types of Liabilities

So now let's discuss some of the most common current liabilities and long-term liabilities that you're going to run into in this class. Now a lot of these you've seen before. We've talked about a lot of these things, but I like to have them all in one place. So you can kind of refer to this when you want to think about your liabilities. Alright? So let's go ahead and start here with our current liabilities. And remember, when we talk about current, that's when they're payable within 1 year. Right? We're going to have to pay these out within 1 year. Liabilities, this is stuff we owe. Well, these are going to come due within the year. Okay? So remember, accounts payable. This is the one we talk about all the time. Accounts payable, well, this one amounts that were owed to suppliers, right? So this is kind of our day-to-day. This is where like a general liabilities account. We got an invoice from a supplier, maybe for some inventory that we purchased. Or it could even be just a general invoice that we got for lawn maintenance, right? They came and mowed our lawn and they sent us an invoice. Well, this is an account payable. Just general day-to-day stuff, right? Day-to-day stuff. And this is when we receive an invoice, but we haven't paid it yet, right? So we take the expense now, but we haven't paid for it, so we have this account payable, right? We can either pay now with cash or we can pay later with an accounts payable. Now similar to accounts payable, but a little different, we have these accrued expenses. Now these accrued expenses, they're liabilities that arise from our adjusting entries. Okay? So when we have accrued expenses, we're talking about a little more specific details. So remember, we did adjusting entries, we talked about accrued expenses and we focused on salaries payable, right? We had salaries payable where we had an employee that worked for us for a few days, but we hadn't paid them yet. And it was time to release our financial statements. So we have to take into account those days that they work for us as an expense. But since we haven't paid them yet, what we're going to adjust our books and add this payable. Okay? So that would be an accrued expense. And we'll end up paying it in the next period, right? So notice, with accounts payable, it's a little more of a general account. Where we just kind of receive an invoice. Okay, we have an account payable. With these accrued expenses, there are a little more details, right? We've got our salaries and wages payable, interest payable, taxes payable. These all come from these adjusting entries. Cool? Alright. So, the next one here, we've talked about as well. Remember, unearned revenues. That might sound like a revenue account because it says revenue right there. But unearned, that's the key word. When we're talking about unearned revenues, well, that's when we have a liability in this case because the customer paid us in advance. Right? So think about this. The customer paid us in advance, but we haven't done anything for them, right? Done anything for them at this point yet. So when they gave us that money, well, if we don't end up delivering the good or doing the service for them, we're going to have to give them that money back. Right? So at this point, when they give us money in advance, we owe them something. And that owing is a liability. So that's the unearned revenues. And we talked about those in greater detail when we did adjusting entries, right? So if you wanted to go back there, you could get the details about unearned revenues again, from that video. So remember, unearned revenues, you might see a couple of different names. Deferred revenues, customer deposits, right? They all mean the same thing. But they can have different names and it's okay. You just have to be aware that they can have different names, for the same account. Okay? The next one here is payroll liabilities. So we talked about salary expense and the salaries payable above, but there's other liabilities that arise from payroll as well. There's taxes that we have to pay, right? In the US we pay like social security taxes. Well, the employee isn't the only one that pays those taxes. The employer is also liable for some taxes related to payroll. And there's other expenses that come up from payroll. Maybe you provide health insurance for your employees, right? So all of these things, we go into detail in another video. If your book goes into those details and your professor focuses on that, we're going to have a video where we dive into payroll liabilities. But it's just good to know that this is one of the most common current liabilities that we deal with. Right? So there's several different types that fall into these payroll liabilities. And the main one there is those employment taxes, like the social security taxes, and yeah. Things like that. So the last one here, that's a common current liability, is the current maturities of long-term debt. This one's pretty interesting, right? We've got long-term debt, right? So long-term, meaning we're going to have to pay it in the long-term. So not in the current year. But we have current maturities of that long-term debt. Okay? So what does that mean? Think about a mortgage. Maybe there's a mortgage that's like a 15-year mortgage or a 30-year mortgage on a house, right? Well, you make monthly payments on that mortgage, right? So you have this long-term debt, right? It's a 30-year loan, but there are payments that you're making in the current year. So those current year payments, well those are going to be current liabilities and the rest of those payments are long-term liabilities. Okay? So the current portion of the long-term debt, well, those are current liabilities and those are the upcoming principal payments that you're going to be making on that long-term, note payable that you might have. Okay? So we also dive into long, current portion of long-term debt in more detail in a later video as well. So we'll have more information there. So that's pretty much it for the current liabilities. Let's go ahead and discuss these 2 long-term liabilities because these are the most common ones you're going to see. And remember, long-term liabilities, these are payable in more than 1 year, right? So there are long-term liability, you don't have to pay them off in the short term, you have time to pay them off. So the 2 we always see is notes payable and bonds payable. For the most part, they're very similar. Notes payable, well this is a signed contract and you borrowed some money. This is usually from a bank, right? A bank is going to loan you some sum of money. And why are they going to loan you money? Because you're going to pay back_interest. Right? So, you're going to take this loan from the bank and you're going to pay them back with interest. Okay? And what we're going to see is that notes payable, they can be current liabilities or long-term liabilities. Right? You can sign a note payable that you're going to pay it back in 6 months. Well, Well, that's a current liability. But most of the time, I would say 99% of the time, when we're dealing with notes payable, they're long-term liabilities. Okay? It's going to be a loan that you take for 10 years, 20 years, something like that. Okay? And we've talked about notes receivable in a previous video. Well, notes payable are the exact opposite. Right? The bank has a note receivable when you take out a loan and you have a note payable. Right? So So if you loan someone out money on a note, well you have a note receivable and they have a note payable. So there's always one and the other happening at the same time. Cool? So they're the exact opposite of each other. And what you're gonna notice with bonds payable, they're pretty similar too. You're also raising money. Money. You're also taking on debt in a similar way. But it's not just from say one bank where you signed a loan with a bank. Here you're going to raise, debt from multiple lenders, okay? So usually what you do is maybe you're trying to raise a $1,000,000 worth of debt. Well, you'll sell a bunch of $1,000 bonds, right? You can sell a $1,000,000 bonds to different people. Instead of going to one bank and raising a $1,000,000, now you can get $1,000 here, $1,000 there, right? And it's similar that you're going to be paying interest, right? So you're still going to be paying interest here. And that's the reason that people will want to buy those bonds from you. Okay? So just like I said, right? You're raising large sums of money, and it might be difficult to borrow it from just one source. Okay? That's why you might do bonds payable instead of just going to a bank. The bank might not be comfortable lending you a $1,000,000 but you might be able to find a thousand people willing to lend you a $1,000. Okay? So that's about it for the most common liabilities you're going to run into. We're going to dive into some more detail into a lot of these. Alright? So let's go ahead and do that in the next video.

Here’s what students ask on this topic:

What are the most common types of current liabilities?

The most common types of current liabilities include accounts payable, accrued expenses, unearned revenues, payroll liabilities, and current maturities of long-term debt. Accounts payable are amounts owed to suppliers for goods or services received but not yet paid for. Accrued expenses arise from adjusting entries, such as salaries payable, where expenses are recognized before payment. Unearned revenues occur when customers pay in advance for services or goods not yet delivered. Payroll liabilities encompass taxes and other deductions related to employee compensation. Current maturities of long-term debt refer to the portion of long-term debt that is due within the current year.

How do accounts payable differ from accrued expenses?

Accounts payable and accrued expenses are both current liabilities but differ in their origins. Accounts payable arise from receiving an invoice for goods or services that have been received but not yet paid for, such as inventory purchases or maintenance services. In contrast, accrued expenses result from adjusting entries for expenses that have been incurred but not yet paid, such as salaries payable or interest payable. While accounts payable are more general and involve external invoices, accrued expenses are more specific and often involve internal accounting adjustments.

What are unearned revenues and how are they recorded?

Unearned revenues, also known as deferred revenues or customer deposits, are liabilities that occur when a customer pays in advance for goods or services that have not yet been delivered. Since the company owes the customer the service or product, this advance payment is recorded as a liability. When the service is performed or the product is delivered, the liability is reduced, and the revenue is recognized. This ensures that revenue is matched with the period in which the service or product is provided.

What are the main differences between notes payable and bonds payable?

Notes payable and bonds payable are both long-term liabilities but differ in their structure and sources. Notes payable typically involve borrowing money from a single lender, such as a bank, under a signed contract with agreed-upon terms for repayment and interest. They can be either short-term or long-term, depending on the repayment period. Bonds payable, on the other hand, involve raising debt from multiple lenders by issuing bonds. Each bond represents a portion of the total debt, and the issuer pays interest to bondholders. Bonds are usually used to raise large sums of money and are often traded in financial markets.

What are payroll liabilities and what do they include?

Payroll liabilities are current liabilities that arise from the compensation of employees. They include various taxes and deductions that the employer is responsible for, such as Social Security taxes, Medicare taxes, federal and state income taxes, and unemployment taxes. Additionally, payroll liabilities may include other employee-related expenses like health insurance premiums, retirement plan contributions, and other benefits. These liabilities are recorded when the payroll is processed and are paid to the respective authorities and benefit providers.