What Is Liability Business - Everything You Need to Know
What is liability business? A business's liability is the legal financial debts or obligations that the company incurs during the course of its operations.3 min read
What is liability business? A business's liability is the legal financial debts or obligations that the company incurs during the course of its operations. In general, liability refers to being responsible for something. In the context of a business, this can be a service or money owed to another party.
About Business Liability
In accounting, a liability is recorded on the right side of the balance sheet. Liabilities include:
- Accrued expenses.
- Accounts payable.
- Deferred revenues.
In business, liabilities play a significant role in the company overall since they are used to finance operations and pay for company expansions. In general, a liability refers to being responsible for something, which can be a service or money owed to another party. For example, tax liability can be for federal taxes owed to the IRS or for a homeowner's property taxes.
Liability can be the legal liability of an individual or business. An example is a business signing up for liability insurance as protection against a lawsuit by a customer or employee.
About Short-Term Liabilities
When analyzing a company, it's considered whether the business can pay its current liabilities, in cash, within a year. These are considered short-term liabilities. Types of short-term liabilities include:
- Sales taxes payable: When a purchase is made by a customer, it includes sales tax. These amounts are held until it's time to pay the appropriate revenue department.
- Payroll taxes payable: When employees are paid, payroll taxes are withheld and set aside by the employer and paid to the Internal Revenue Service (IRS) or state tax agency.
- Loans and mortgages payable: This liability is for the monthly payments on mortgages or loans.
Liabilities like the payroll tax and the sales tax are sometimes referred to as trust fund taxes. This is because the funds are being held in a trust and are counted as liabilities until the taxes are paid to the appropriate state or federal agency.
About Long-Term Liabilities
Analysts also look at long-term liabilities and whether they can be paid using assets resulting from future earnings and/or financial transactions. When listing long-term liability, debt is not the only thing considered. Other long-term liabilities include:
- Deferred taxes.
- Pension obligations.
- Loans payable.
- Mortgages payable.
Assets are what a company owns, which includes both tangible and intangible items. Tangible items are things such as equipment, buildings, and machinery. Intangible items are things like patents, intellectual property, and accounts receivable.
When a business deducts its liabilities from its assets, the difference becomes the equity of either the owner or the stockholder. This can be expressed as this formula: assets - liabilities = owner's equity. However, the equation is usually presented as: liabilities + equity = assets.
The Difference Between Expense and Liability
For a company to generate revenue, it must incur expenses for the operational costs of the business. Unlike assets and liabilities, expenses and revenue are listed on the income statement. In other words, when calculating net income, expenses are factored into the equation.
To calculate net income, the equation is revenues - expenses. For example, consider a company that has more expenses than revenue for several years. This would show weak financial stability because the company has continually been losing money. When an ongoing payment is made for services or something that has no tangible value, it is considered an expense. Expenses are used to generate revenue.
Expenses may fall into the general or administrative category and others may be associated with sales. For example, the phones in an office, utility bills, and the lease payment for office space will no longer work or can be used if the expense isn't paid. For accounting purposes, expenses and liabilities appear in different places on the company's financial statement. Expenses appear on the company's profit and loss statement.
Leverage and Liability
Leverage refers to the manner in which a business acquires new assets. When the assets are acquired through loans, it increases the liabilities. When this happens, the business is referred to as being leveraged. While some liability is considered good for a business, too much liability can harm the company's financial position.
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