• Naomi Cauley

Liability Accounts Explained

Typically, there are two types of Liability Accounts.

1. Current Liabilities

Current Liabilities are those liabilities you will have to pay within 12 months. They include Creditors or Accounts Payable. It also includes your GST liability account.

If you have Payroll, Current Liabilities include Wages Payable account, PAYG Payable account and your Superannuation Payable account.

Some businesses keep track of Accruals, which are invoices the business has received payment for in advance. An example of this would be where the business is involved in major projects that span several months and receive progress payments. For example:

The business hosts events that receive sponsorship funding once a year. The events are held monthly. The major sponsor makes a payment of $600 on the 1st of January. They calculate that the sponsorship value to the business is $50 per month. At the end of January, they allocate $550 of the sponsorship funds to Accruals, which takes it out of the Profit and Loss and assigns it to the Balance Sheet.

The benefit of this is that they can attain a more accurate picture of the business’s profit for that month, instead of having a large sponsorship income showing in January and then not appearing for the next 11 months.

Each month, they would drawn down $50 from the Accruals in the Balance Sheet and apply it to Sponsorship Income in the Profit and Loss.

Since Accruals records income paid in advance, it is a Liability to the business. Theoretically, should the sponsor decide to withdraw and ask for a refund, the Accrual would be cashed out and a refund paid to the Sponsor.

2. Non Current Liabilities

Most other liabilities are Non Current, meaning they are not expected to be paid out within the next 12 months. They include long term Loans.

When you allocate your Liabilities correctly, interpreting the Balance Sheet becomes much easier. A good Balance Sheet would look something like this:

Balance Sheet Example

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