Bookkeeping Basics: Understanding Liabilities

In our previous posts, we covered the Chart of Accounts and Assets. Now, let's dive into the second account type: Liabilities.

If assets are what your business owns, liabilities are what your business owes. Understanding liabilities is essential for managing your cash flow, planning for payments, and getting a clear picture of your business's financial health.

What Are Liabilities?

Liabilities are money, goods, or services that you owe to others. They represent your business's financial obligations—whether that's money you need to repay, services you've promised to deliver, or taxes you owe to the government.

In your Chart of Accounts, liabilities are represented by the 2s (account numbers starting with 2,000).

Let's break down the most common types of liabilities you'll encounter in your business:

1. Accounts Payable (AP)

Account Number: 2100

Accounts Payable (often called AP) is the money you owe to your suppliers or vendors for goods and services they've provided to you—but that you haven't paid for yet.

Quick tip to remember the difference:

• Accounts Receivable (AR) = Received – Money coming to you
• Accounts Payable (AP) = Paid – Money going from you

Example: You order office supplies from a vendor and receive an invoice for $500 due in 30 days. Until you pay that invoice, it sits in your Accounts Payable.

Why it matters: Tracking AP helps you manage cash flow and ensures you pay vendors on time, maintaining good business relationships.

2. Credit Cards

If your business has credit cards, the balances you carry are liabilities. You owe that money back to the credit card company.

Example: You charge $2,000 in business expenses to your company credit card. Until you pay off that balance, it's recorded as a liability.

Why it matters: Keeping track of credit card debt helps you understand your total financial obligations and plan for repayment.

3. Loans & Lines of Credit

Any loans or lines of credit your business has taken out are liabilities because you owe that money back—often with interest.

Examples:

• Business loan from a bank
• Equipment financing
• Line of credit on your business bank account

Why it matters: Knowing your loan balances and payment schedules helps you budget and avoid cash flow issues.

4. Gift Cards

Here's one that might surprise you: gift cards are liabilities!

You might be thinking, "But I already received the money for the gift card!" That's true—but you haven't yet provided the goods or services. Until the gift card is redeemed, you owe the customer that product or service.

How it works:

• Customer buys a $50 gift card → You receive $50 in cash
• The $50 sits in your Gift Card Liability account
• When the customer redeems the gift card, you reduce the liability and record the income

Why it matters: Gift cards are considered unearned revenue until they're redeemed. Tracking them as liabilities ensures your financial statements accurately reflect what you owe.

5. Tax Payables

Any taxes you owe to the government are recorded as liabilities until they're paid. This includes:

• Sales Tax Payable (if you're registered to collect sales tax)
• Payroll Tax Payable (taxes withheld from employee paychecks)
• Corporate Tax Payable (income tax your business owes)

Example: You collect $500 in sales tax from customers during the month. That $500 sits in your Sales Tax Payable account until you remit it to the government.

Why it matters: Tracking tax payables ensures you set aside the money you owe and pay on time, avoiding penalties and interest.

6. Due to Shareholders

If you (or other shareholders) have personally put money into the business, that money is a liability to the business—because it's technically owed back to you.

How it works:

• It's an asset to you personally (you're owed that money)
• It's a liability to the business (the business owes you that money)

Example: You invest $10,000 of your own money into your business to cover startup costs. That $10,000 is recorded as "Due to Shareholders" until the business pays you back.

Why it matters: This keeps personal and business finances separated and tracks what the business owes to its owners.

Quick Recap: Types of Liabilities

✅ Accounts Payable (AP) – Money you owe to suppliers 

✅ Credit Cards – Outstanding credit card balances 

✅ Loans & Lines of Credit – Money borrowed that must be repaid 

✅ Gift Cards – Goods or services owed to customers

✅ Tax Payables – Sales tax, payroll tax, corporate tax owed to the government 

✅ Due to Shareholders – Money the business owes to its owners

Why Understanding Liabilities Matters

When you understand your liabilities, you can:

• Manage cash flow by knowing what payments are coming due
• Avoid surprises by tracking what you owe before it's due
• Plan for growth by understanding your debt obligations
• Maintain good relationships with vendors by paying on time
• Communicate clearly with your bookkeeper or accountant

Liabilities aren't something to fear—they're a normal part of running a business. The key is to track them accurately and manage them responsibly.

Have questions about liabilities or bookkeeping in general? Hit reply!