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Lesson 1: Introduction to Accounting and Business
Liabilities: What the Company Owes
Liabilities are the business's debts (i.e., creditors' claims on assets). Either borrowing money or buying on credit creates a liability.
Examples include
- accounts payable,
- notes payable,
- taxes payable,
- utilities payable, and
- wages payable.
We will discuss accounts payable and notes payable below. Taxes payable refers to the amount owed but not yet paid for taxes. Utilities payable refers to the amount that is owed but not yet paid; we have received the bill but have not paid it yet. Wages payable represents the amount of wages due to employees that have not yet been paid. Lesson 3 will explain wages payable in greater detail.
Accounts Payable (A/P)
Accounts payable (A/P) refers to our promise to pay in the future for services performed for us or for goods purchased.
Notes Payable (N/P)
A note payable (N/P) occurs when the debt will not be paid in a short period of time (usually 30 days), and therefore the creditor (the person you owe) will expect additional compensation in the form of interest for the use of her money. The note usually includes a written promise to pay and contains terms concerning the due date and interest rate.
Think in terms of your own experiences: You borrow money from a bank to purchase a new car. The bank loans you the money for three years at an annual interest rate of 6%. You have a note payable. You will make monthly payments to repay the loan. Your monthly payments include payment toward the principal (repaying the amount owed) and interest (your cost to borrow money).
Liability Due to Prepayment
Another type of liability occurs when the company has received a prepayment for products or services that have not yet been delivered. The company now has a liability because it owes something: It must deliver on the product or service or it must return the money.