You create a liability anytime you buy something for your business with borrowed money. This includes paying by credit card unless you pay the balance in full each month. A mortgage for commercial property and a business loan are two common examples of a business liability.
While an expense is an ongoing item you pay each month, such as telephone or utility service for your company, liability is typically a one-time purchase or an amount you hold in reserves until it becomes payable. If you fail to make a payment on an expense, the company offering the service will no longer allow you to access it. That expense then goes away. On the other hand, you are responsible for a business liability until paid in full or you sell the item. This is true even if you sell your business or retire.
Long-Term and Short-Term Examples of a Business Liability
A long-term liability is one that your business takes on that you expect to take more than a year to pay in full. The mortgage and loan examples above work well here. A short-term liability is anything that you expect to remit payment for in less than one year. Some typical examples include monthly payments on mortgages and loans, payroll taxes collected from employees and set aside until due, and sales tax collected from customers and paid to the state later.
How Expenses and Liabilities Appear on a Balance Sheet
Most outgoing payments companies make each month are for expenses. When preparing a business financial statement, an accountant associates liabilities with assets and includes them on the balance sheet. Expenses, which coordinate with revenue, typically go on a company’s profit and loss statement. This is also known as an income statement.
Do you need assistance determining what is business liability and what is an expense? Feel free to contact Grecco Capital today.