Liability Accounts Explanation and Examples

What is the source of the assets a company owns? The organization cannot function without a constant flow of funds. The company takes money from various sources: loans, equity capital, profits, and so on. All of them must be recorded on the account. All operations that the legal entity conducted should be clear and obvious from these reports.

Bookkeeping assumes a recording of the transactions carried out by the company. Based on its data, you can get information about the activities of the business, its stability. Within the framework of accounting, there are liability accounts and asset accounts. On the first, the sources of enterprise resources are recorded, on the second – the resources themselves.

Liability Accounts

An account is a form of an economic grouping of business transactions that allows for control over the movement and condition of economic assets of an enterprise, as well as the sources of their formation. Liability accounts are created to account for the movement of sources of everything owned by the company as well as their changes.

Liability Accounts Explanation and Examples

The liability accounts can store information on the change in the amount of company’s capital, changes in the composition of debts, the movement of money between liability accounts (for example, deduction of tax deductions from salaries), and the emergence of obligations before suppliers, employees or other entities.

Examples

Examples of an entity’s liabilities:

  • Retained earnings: These are liabilities related to the entity’s own funds. It is formed as follows: as a result of its activities, the enterprise makes a profit, after which it pays taxes and pays dividends to the owners, and everything that remains is reflected in retained earnings;
  • Accounts payable: This is a debt of an enterprise to certain individuals and legal entities, including employees. Accounts payable are reflected in the Balance sheet as short-term liabilities;
  • Long-term loans and borrowings: An enterprise can take long-term loans, for example, a car loan, then a debt that is part of long-term obligations is formed.

In contrast to asset accounts, they always have a credit opening balance that shows the amount of equity or liabilities of the organization at the beginning of the reporting period. A debit entry in the liability accounts reflects a decrease in capital or liabilities, and credit entry shows their increase.

Liability Accounts Explanation and Examples

The ending balance must be a credit. It gives information about the amount of the company’s capital and its liabilities at the end of the reporting period and is determined as the sum of the opening balance and credit entries, reduced by the amount of debit entries.

As you can see, in the process of any economic activity, all funds of the enterprise are in constant movement, which must be strictly monitored, recorded, and documented. Liability and other accounts are a way of such a visual and clear reflection of the impact of any business transaction on changes in accounting objects. Their management is a complex mechanism that requires timeliness and utmost precision because the smallest mistake can lead to a break in the entire system.

Liability Accounts Explanation and Examples

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