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As explained in Chapter 1, a liability is an obligation to pay for an asset in the future. One purpose of liabilities is to finance the purchase of assets like land, buildings, and equipment. Liabilities are also used to finance day-to-day operating activities. Examples of liability accounts are reviewed below.
- Accounts payable are debts owed to suppliers for goods purchased or services received as a result of day-to-day operating activities. An example of a service received on credit might be a plumber billing the business for a repair.
- Wages payable are wages owed to employees for work performed but not paid at the balance sheet date.
- Bank loans are debts owed to a bank or other financial institution.
- Unearned revenues are payments received in advance of the product or service being provided. If a customer pays $1,000 for an automobile repair to be done in the next accounting period, this is recorded as a liability.
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