What exactly are liabilities, anyway?

Told you I'd come back to this one! You are a small business owner. You are the best at what you do. You have passion for what you do. Yet, you aren't quite sure what people are talking about when you hear the word, "liability". That's something your CPA will handle at tax time, right? Well yes, but no. You need to understand how to handle them prior to then.

Very simply put, a liability is something you owe. Things like business loans, car loans, bills you owe to vendors, and even the sales tax you collect for the city and state. Liabilities are listed second on your balance sheet. Together with the equity you have in your business they total your assets. There are 2 types of liabilites.

Current liabilities. These are those items that are due paid within a year, such as the sales tax paid to the state or local government that you have collected from your customers, and the payroll taxes you collect for the government from your employees' paychecks, as well as the bills you owe vendors for supplies or services.

Long-term liabilities. These are the items that are due payable in more than a year. An example would be the portion of a loan that is due more than a year from now. For example, if you have a 5 year loan, you might show the next 12 months on the current part of the liabilities section of your balance sheet, while the remaining 4 years will reside on the long-term portion of your balance sheet liability section.