It is imperative for all business owners and entrepreneurs to understand this term. But first understand what liabilities are and how understanding this term can help business owners in managing this aspect of business competently.

“Liabilities” Definition:

The term “Liabilities” refers to those monetary commitments that a business is obliged to pay back to another individual or body as a result of a prior commitment.

These are also known as debts that one entity is legally bound to pay back to another entity in form of any type of assets or services at a committed time.

Liabilities Types and Examples:

What are the different types of Liabilities?

Broadly, to understand it in a simple and structured manner, it can be categorized according to the type of agreement/commitment and the time frame of payment.

Current Liabilities:

These are short term commitments. These debts or obligations are mostly supposed to be paid within the time frame of one year.

Examples:

Short term loans:

For example, loans that a business takes and commits to pay back within a year. These are usually small amounts.

Accrued Liabilities:

These are those expenses of businesses that have been incurred but not yet paid like employee’s salaries or taxes owed to government.

Accounts Payable:

This is the payable amount of money to usually vendors or suppliers in exchange of supplied goods or services on credit for business.

Non-current Liabilities:

These are usually long term commitments which are due to be paid in time frame longer than a year.

Examples:

Bonds Payable:

This is the money that a business owes to their bondholders and it is paid over a period of several years, depending on the commitment made and the type of investment of bondholder.

Long term Loans:

These are the loans (usually bigger amounts) that a business acquires and is obliged to be paid back over a period longer than one year, like bank loans.

Deferred Tax:

These are taxes that a business owes but are committed to be paid at a later date in future.

Examples of Liabilities in context of Business and Entrepreneurship:

In order to understand it more comprehensively in context of business, lets’ simplify it more with both small scale and large scale business example.

Liabilities of a Small Scale Business:

Lets’ take example of a coffee café business. It is most likely that this business might have current liabilities (in form of wages payable to staff and accounts payable to raw material suppliers).

The business may also have long-term liability if they have their property secured on a loan that is being paid over a longer period of time. 

Liabilities of a Large Scale Business:

An example for a large scale business would be any multinational corporation where the business would have short term dues payable to suppliers of material along with long term commitments like bonds issued to investors or warranty claims by customers on their already sold products. These are all different types of liabilities of businesses.    

Why it is important for all the business owners and entrepreneurs to understand liabilities to run their businesses?

Cash Flow System:

It is crucially needful for entrepreneurs to known about all the current and potential liabilities that their business may owe because it helps them properly manage their cash flow.

Debt Repayment:

This understanding also ensures that a business is adequately able to manage their debt/loans at given deadlines to avoid any late payment fines.

Future Moves:

Another important aspect of having a thorough understanding in this regard and knowing what all are your compulsory obligations and what liabilities you can avoid is equally important to take the precise decision in case a business owner is seeking potential to expand business, or in case of hard time is planning to scale back to survive.