How to Read Liability Accounts for Financial Reporting - dummies

How to Read Liability Accounts for Financial Reporting

By Lita Epstein

It is important for you to understand how to read your company’s liability accounts in the Chart of Accounts. Money a company owes to creditors, vendors, suppliers, contractors, employees, government entities, and anyone else who provides products or services to the company is called a liability.

Current liabilities

Current liabilities include money owed in the next 12 months. The following accounts record current liability transactions:

  • Accounts payable: This account includes all the payments to suppliers, vendors, contractors, and consultants that are due in less than one year. Most of the payments made on these accounts are for invoices due in less than two months.

  • Sales tax collected: This account tracks taxes collected for the state, local, or federal government on merchandise the company has sold. Firms record daily transactions in this account as they collect cash and make payments (usually monthly) to government agencies.

  • Accrued payroll taxes: This account includes any taxes that the company must pay to the state or federal government, based on taxes withheld from employees’ checks. These payments are usually made monthly or quarterly.

  • Credit card payable: This account tracks the payments to corporate credit cards. Some companies use these accounts as management tools for tracking employee activities and set them up by employee name, department name, or whatever method the company finds useful for monitoring credit card use.

Long-term liabilities

Long-term liabilities include money due beyond the next 12 months. Companies use the following accounts to record long-term liability transactions:

  • Loans payable: This account tracks debts, such as mortgages or loans on vehicles, that are incurred for longer than one year.

  • Bonds payable: This account tracks corporate bonds that have been issued for a term longer than one year. Bonds are a type of debt sold on the market that must be repaid in full with interest.