Liabilities are things your business owes, for example a payment to one of your suppliers. Non-current liabilities are not due for at least a year.
While an asset is something that your business owns or is owed, a liability is something that you owe. Examples of liabilities are loans you owe to banks, wages, and money that you have to pay to your suppliers.
Liabilities can be sorted into the categories non-current, current, and contingent.
Current versus non-current liabilities
Current liabilities are things that you have to pay within the next twelve months. Examples include incoming invoices from suppliers, tax that you pay to the tax authorities, wages you pay to employees, and overdrafts you owe to your bank.
Current liabilities are long-term debts, such as a loan from the bank, a mortgage, or other payments that aren’t due within the next twelve months.
These two types of liabilities can also be called short-term and long-term liabilities.
Contingent liabilities
Contingent liabilities are liabilities that you might have to pay. Whether or not you do, is dependent on what happens in the future. One example is a customer contacting you regarding their warranty, or another party involving you in a lawsuit.
If the customer ends up claiming warranty, you have to refund them their money. If you get sued and lose the case, you have to pay the other party money. If the customer doesn’t claim warranty—or there is no grounds for their claim—or you win the courtcase, then the contingent liability doesn’t come true.
Liabilities on your balance sheet
Liabilities should be included on your balance sheet, which is one of the financial statements you have to submit as part of your annual report. The balance sheet shows what your business owns and owes, so you have to include both assets and liabilities.
You only include contingent liabilities if they’re likely to come true.