Every business has liabilities at some point, but did you know that they are several different types of liabilities? While accounting software can help you keep track of your liabilities, it is still important for businesses to understand what liabilities are and the different types of liabilities they may find on their balance sheet. Keep reading to learn all about business liabilities.
What is a business liability?
Liability refers to something owed or borrowed. It is being responsible for something else, such as someone else's money or services owed to someone else. Most commonly, they are a debt that a business plans to pay back under the expectation that their future income will be more than enough to cover what they owe. Just like with assets, having liabilities comes with the territory of running a business. But even though having liabilities means a business likely owes money, it is not necessarily a bad thing. In fact, they usually help business operations grow.
How do liabilities work?
Basically, a business liability is something a business owes another company usually money or a legal obligation of some kind. There are current liabilities and non-current liabilities, and there are also what's known as contingent liabilities.
The reason liabilities are an essential part of a business is because they are often used to help finance operations and expansions. Common liabilities for businesses include accounts payable, income taxes payable, interest payable, bonds payable, accrued expenses, and more.
Types of liabilities
There are two categories of business liabilities: current (short-term liabilities) and non-current (long-term liabilities).
Also known as short-term liabilities, these are any debts payable within one year. Some examples of current liabilities include the following:
- Accounts payable: represents any debts owed to other businesses, such as vendors, utilities, suppliers and more. This is the most familiar business liability and the one most small business owners start with. Most accounts payable items must be paid within 30 days, but sometimes it is even less.
- Interest payable: the interest incurred when a business uses credit to purchase goods and services over short periods. This also counts for interest incurred on any long-term loans. Chances are they have monthly interest owed for the year as well.
- Short-term loans: are considered short-term when they are payable within 12 months. Any loan that extends past one year is considered a long-term liability.
- Accrued expenses: are expenses that are acknowledged in the books before they are paid, such as a quarterly bill that is divided up to be accounted for monthly. Types of accrued expenses include salaries, rental payments and utilities.
- Taxes payable: as taxes are paid either monthly, quarterly or annually, they are considered short-term liabilities as they must be paid within the year (e.g., income taxes, sales taxes, property taxes).
- Unearned revenue: when a business is paid in advance for goods or services that will be delivered at a later date.
Also known as long-term liabilities, these are any debts that are payable over a period longer than one year. Some common types of long-term liabilities include the following:
- Bonds payable: also known as long-term debt, are the most common long-term liability. These are mostly issued by large corporations, governments and hospitals. Bonds payable is a form of debt financing (e.g., a loan) generated to help a company generate cash. The business agrees to make a series of payments over time plus interest in order to pay back the investor what the company owes.
- Notes payable: are a written promise to pay debts owed. Notes payable are similar to accounts payable but are paid back long-term with a formal written agreement.
- Deferred tax liabilities: refers to any taxes that are due in more than 12 months that your business needs to pay for.
- Mortgage payable: as mortgages are generally paid back over several years, this makes it a long-term liability. However, the incurred interest and principal due within each year are part of the business's short-term liabilities.
- Warranty liability: in which a business records the estimated amount it would have to spend to repair or replace a product or service during its warranty period.
- Post-employment benefits: are promises made by the company to pay for benefits to their retired employees (i.e., life insurance and health insurance).
- Capital leases: refers to when a business opts to lease a piece of equipment instead of purchasing it in full. These are recorded on the company's balance sheet as long-term liabilities to show the amount owing on the lease agreement.
Contingent liabilities are less commonly seen on the balance sheet than short-term liabilities or long-term liabilities. However, they are still the third most commonly seen liability. This is because contingent liabilities are liabilities that may or may not occur depending on the outcome of a future event.
Also referred to as potential liabilities, they include potential lawsuits or product warranties. Contingent liabilities are only recorded on the company's balance sheet when the probability is at least 50% likely to occur. For example, if a lawsuit that a company was facing was dropped or the company won, the company would not need to record it on its balance sheet.
How can I tell that something is a business liability?
A business liability is something a business borrows from or owes to someone else. Sometimes liabilities are wrong, like a potential lawsuit, while other times they are good, like a loan that helps to expand the business.
What is the difference between short-term liabilities and long-term liabilities?
Both current liabilities and non-current liabilities convey the amount of money owed to other businesses. However, current liabilities reflect money that is due within the year, and long-term liabilities represent how much money is owed that is not due for a longer period of time. Current liabilities are generally paid for with current assets, while long-term liabilities are more likely loan repayments or deferral payments.
Why do I need to separate my liabilities on my balance sheet?
If you are a small business owner, chances are good that the only liability on your balance sheet is accounts payable and possibly rent, utilities and a small business loan. In that case, for your own reporting purposes, you can record these however you choose. However, if you need to share your financial statements with other companies, such as investors, lenders and banks, you will need to make sure that you separate your short-term and long-term liabilities to make it easier to see which ones are due sooner rather than later.
How can I keep track of my business liabilities more easily?
The easiest way to keep track of your business liabilities is by using accounting software. Accounting software helps businesses manage their day-to-day financials and keep track of their assets, liabilities, revenues and expenses. Businesses can sync their credit cards and bank accounts with the software to streamline the data entry and organization process.
Do I need business liability insurance?
Business insurance, also known as commercial insurance, protects you and your business and pays for any damage occurring due to accidents, disasters, and injuries caused due to one’s negligence — all of which would require additional out-of-pocket expenses for repairs, replacement, and compensation. Business liability insurance eliminates the financial burden of these additional expenses, providing you with the necessary cover to address these emergencies.
What does business insurance cover?
Our insurance brokers are dedicated to providing your growing enterprise with the right financial protection for property damage, loss of income and liability claims. That is why we work with leading insurance providers in Canada who are just as dedicated to tailoring industry-specific coverage at very competitive rates.
While commercial insurance will vary based on various factors, you can generally expect the following to be covered in your business insurance policy:
- Buildings: avoid out-of-pocket costs for restoration and rebuilding damaged buildings caused by the insured perils.
- Contents, stock & equipment: every business has contents of some kind of stock or equipment like computers, phone systems, forklifts etc., and these items need to be insured properly as it is the lifeblood of any business.
- Leasehold improvements: to ensure the leasehold improvements made in a rented commercial place are the responsibility of the tenant. This coverage allows the tenant to rebuild the space back to what it was before any insured damage.
- Commercial liability: protect your business, its reputation, and its financial liability from costly liability claims in case of injuries suffered by others as well as damage to a third party's property caused by negligence.
- Business income coverage: secure your bottom line and avoid loss of income caused by accidents, disasters, crime, and other events that would otherwise have devastating impacts on business continuity.
- Commercial auto coverage: protect assets such as vehicles used in service delivery or transporting goods and get coverage for damage to the vehicle and potential liability claims made by third parties.
- Transit coverage: protect business assets from damage and secure necessary cover for when repairs or replacements are required due to accidents or mishandling while in transit.
Ask our brokers about business insurance
Our insurance brokers are proud to support the needs and Canadian businesses. That is why we partner with leading insurance companies to obtain multiple quotes for your business. In other words, “we do the shopping for you.”
- Tell us about your business: there is no one-size-fits-all solution. Small businesses and established enterprises alike require tailored solutions for protecting assets and ensuring financial viability. Tell our brokers about your industry, the size, and the risks that it is exposed to — and we will obtain the right coverage for your business.
- Compare quotes: We represent several insurance companies and shop the rates of these companies and negotiate the terms and rates that meet your insurance needs.
Let our experts find business insurance for you
Every business is unique. This means there is no one-size-fits-all solution for finding the right business insurance coverage. There are several factors to consider and keep in mind. You are the expert on your business; we are the experts when it comes to insuring your business. We know the right questions to ask, and we will recommend the right coverage for you
Contact BrokerLink to learn more about business insurance
At BrokerLink, our brokers have extensive expertise in business insurance. We can help you get the coverage you need. You can reach out to us by completing an online quote in just a few minutes or calling us. You can also visit one of our 200+ community branches across Canada.