Liabilities: balance sheet accounts

Hello. Janis Weber here. I'm talking to you about introductory financial accounting concepts at an overview level, hoping to spark an interest for you to study further about these topics.

My background in accounting spans two careers. I started as a CPA in public practice and worked several years, and then I converted to be an educator, and now I teach for a public university. In this session, I'm going to be talking about liabilities as they would show up on a financial statement, the balance sheet in particular, and this will hopefully help you be able to realize what you're looking at when you look at a balance sheet in the liabilities section in particular.

There are several different happenings in a company that could produce a liability that needed to be recorded. I have pulled some of the happenings that would produce those liabilities, but this is not a comprehensive list. There could be other things that could happen that would mean the company would need to record a liability. But the three that I'm going to highlight, first would be the company's debts. If the company borrows money from the bank or from some other organization, they would have to pay them back with interest so those debts would be reflected. So that could be notes payable or bonds payable. Then, operating costs could also produce a liability, because the company might owe for their utilities, maybe some sales tax payable or payroll tax payables, which would show as liabilities, plus some long-term liabilities could show up in the operating cost area that would be something like pension cost. Those definitely are part of the liabilities as well. But the one that is surprising to some is obligations that can show up as liabilities. Sometimes the amount that's showing us a liability doesn't represent an amount of cash we're going to have to give to an outsider later. Instead, it reflects a service or a product that we owe them. This usually arises when a customer prepays for goods or services that we would provide in the future. That prepaid revenue means we can't recognize it as revenue. So instead, we show it as a liability of something we're going to provide to them in the future. It's a contract that we owe them for.