Contra Liability Account: What it is, How it Works, Example

Types of Liability Accounts

Liabilities don’t have to be a scary thing, they’re just a normal part of doing business. Because chances are pretty high that you’re going to have some kind of debt. And if your business does have debt, you’re going to have liabilities. Under this program, FHFA may issue orders suspending an individual or entity from doing business with the regulated entities. If you're responsible for an accident, your rate will almost always go up unless your insurer offers some sort of accident forgiveness feature.

Types of Liability Accounts

Short-Term Liabilities

As a practical example of understanding a firm's liabilities, let's look at a historical example using AT&T's (T) 2020 balance sheet. The current/short-term liabilities are separated from long-term/non-current liabilities on the balance sheet. An expense is the cost of operations that a company incurs to generate revenue. Unlike assets and liabilities, expenses are related to revenue, and both are listed on a company's income statement. The equation to calculate net income is revenues minus expenses. However, if one company's debt is mostly short-term debt, it might run into cash flow issues if not enough revenue is generated to meet its obligations.

Examples of Short-Term Liabilities

  • Photos of vehicle or property damage can come into play, as well as a specific state's traffic laws.
  • This includes medical care, physical therapy and compensation for lost wages.
  • Notes Payable – A note payable is a long-term contract to borrow money from a creditor.
  • With smaller companies, other line items like accounts payable (AP) and various future liabilities like payroll, taxes will be higher current debt obligations.
  • Conversely, companies might use accounts payables as a way to boost their cash.
  • Her work has been featured by Fortune 500 companies, fintech startups and national personal finance brands such as Business Insider.

In conclusion, proper recognition and measurement of liabilities are essential for maintaining accurate and transparent financial statements. Understanding the criteria and measurement methods for liabilities helps organizations maintain a clear and confident financial position while facilitating informed decision-making. Janet Berry-Johnson, CPA, is a freelance writer with over a decade of experience working on both the tax and audit sides of an accounting firm.

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Westfield sells business insurance in 21 states and has a good track record for low complaints. (PDF 295KB) – Information about how to use toll roads, pay your bill, open an account, carpool in the express toll lanes, save money and more. Please be sure to check your rental contract’s terms and conditions before using a toll road. Every rental agency has different policies and some companies add extra fees which we have no control over.

General liability insurance covers your business against liability claims, such as bodily injury and property damage to others. It also includes coverage for damage to reputation, such as slander, libel and copyright infringement. Noncurrent liabilities, or long-term liabilities, are debts that are not due within a year. List your long-term liabilities separately on your balance sheet.

  • Accounting software can easily compile these statements and track the metrics they produce.
  • A contingent liability only gets recorded on your balance sheet if the liability is probable to happen.
  • Making sure that you’re paying off your debts regularly will help reduce your overall business liabilities.
  • Long-term liabilities are obligations that are due in a year or longer, while short-term liabilities come due within a year.

This usually happens because a liability is dependent on the outcome of some type of future event. For example, if your business is facing a potential lawsuit then you would incur liability if the lawsuit becomes successful. It’s worth noting that liabilities are going to vary from industry to industry and business to business. For example, larger businesses are most likely to incur more debts compared to smaller businesses.

Type 1: Notes payable

Similarly, if you have employees, you’ll need to add workers’ comp insurance in most states. In a quick comparison, general liability insurance covers physical risks. Professional liability insurance covers errors and omissions, which are more abstract. Professional liability insurance may cover issues like failure to deliver, professional misconduct, breach of contract and more.