What are Business Liabilities?

Assets vs. Liabilities

Business Liabilities Explained
Business Liabilities Explained. Peter Dazeley/Getty Images

What are Business Liabilities? 

Liabilities are those amounts owed by a business at any one time and shown on the Balance Sheet. Liabilities are often expressed as "payables."

Types of Liabilities

Long-term Liabilities

Long-term liabilities are those obligations of the business which are expected to continue for more than one year. These include loans payable and mortgages payable.

Short-term Liabilities

Short-term liabilities are those obligations of the business which are expected to be paid off within a year. These include

  • Sales taxes payable
    These amounts are collected from customers at time of sale and held until due to be paid to the appropriate state revenue department.
  • Payroll taxes payable
    These amounts are collected from employees (withholding from income taxes and for employment taxes) and set aside by the employer, to be paid at the appropriate time to the IRS or state tax agencies.
  • Loans and mortgages payable
    These are the monthly payments on loans and mortgages.

What's the Difference Between Liabilities and Expenses? 

A liability is usually money owed by a business for he purchase of an asset. For example, you might buy a company car for business use, and when you finance the car, you end up with a loan - that is, a liability. 

An expense is an ongoing payment for something that has no tangible value, or for services.

Expenses are used to generate revenue. The phones in your office, for example, are used to keep in touch with customers. Some expenses may be general or administrative, while others might be associated more directly with sales. 

Most of the payments a business makes are for expenses. For example, you may pay for a lease on an office space, or utilities, or phones.

If you stop paying an expense, the service goes away or the space must be vacated.

Expenses and liabilities also appear in different places on company financial statements. Because they are associated with assets, liabilities appear on the company balance sheet. But expenses, which are associated with revenue, appear on the company income statement (profit and loss statement)

 How are Liabilities Associated with Leverage?

The concept of leverage for a business refers to how a business acquires new assets. If the assets are acquired by loans - that is, through increasing liabilities - the business is said to be leveraged. Some liability is good for a business; too much can harm a business financial position. 

Liability Ratios for Business Analysis

Businesses can measure the amount of debt (liabilities) against two other measures, to determine if the business has too much debt/liability. 

Debt to Equity Ratio. The debt-to-equity ratio measures both short-term and long-term liabilities against the owner's equity account. Rosemary Peavler, business finance expert, says a ratio of more than 40-50% debt to equity means the business owner should look at reducing debt.  

Debt to Asset Ratio. The debt-to-asset ratio measures the percentage of total debt (both long-term and short-term) to the total business assets.

You should have enough assets to sell to pay off your debt, if necessary.