When we hear the word liability, many beginners feel it must be something bad. In simple words, a liability is just like the bills a family has to pay — school fees, house rent, or an EMI. A business also has similar responsibilities. These are amounts the business must pay to others in the future.
In this guide, you will understand what liabilities really mean, how they are divided into current and long-term, and how they appear in everyday Indian businesses. By the end, the idea of liabilities will feel as familiar as managing your monthly home expenses.
What Are Liabilities?
Liabilities are promises to pay money later.
If someone has given you goods, service, or a loan today and you must pay tomorrow, that amount becomes your liability.
In real situations, liabilities can be:
- Salary that employees have earned but not yet received
- Money owed to suppliers for goods bought on credit
- GST or tax payable to the government
- Bank loans like business loan or vehicle loan
A shop may earn profit this month, but if many bills are pending, cash may still be tight. That is why liabilities matter so much.
Current Liabilities – Bills Due Within One Year
Current liabilities are amounts that must be paid soon, usually within the next 12 months. These are like the monthly expenses of a household that cannot be delayed for long.
1. Accounts Payable
Accounts payable means money owed to suppliers.
For example, Ravi runs a mobile accessories shop in Pune. He buys chargers worth ₹40,000 from a wholesaler and gets 30 days to pay. Until Ravi pays that bill, the ₹40,000 is his accounts payable.
In practice, most small Indian businesses run on this credit system. It helps them sell goods first and pay suppliers later.
2. Accrued Expenses
Some expenses grow day by day even without a bill. These are called accrued expenses.
For example, Meenka pays her boutique staff every Friday. If accounts are prepared on Wednesday, salary for Monday to Wednesday is already earned by staff but not yet paid. That three-day salary becomes an accrued expense.
If an employee has unused paid leave, the company still owes that money. Over time, this becomes a liability.
Many beginners get surprised by this idea. Even without a paper bill, the business still owes money.
3. Customer Advances
Sometimes customers pay first and the work happens later.
For example, a carpenter takes ₹30,000 advance to make kitchen cabinets costing ₹90,000. Until the cabinets are ready, that ₹30,000 is not his income. It is a liability because he still owes work to the customer.
This is very common in tailoring shops, wedding decorators, coaching classes, and small contractors across India.
4. Short-Term Part of Big Loans
A long loan may run for many years, but the installments due in the next 12 months are treated as current liability.
For example, a printing shop has a 5-year machine loan. The EMI for the coming year is shown as current liability, while the rest remains long-term.
This helps the owner see how much cash must be arranged soon.
Long-Term Liabilities – Dues After One Year
These are payments that can be made slowly over many years. They give businesses time to grow before repaying.
1. Mortgage or Property Loans
Loans taken against land or buildings are long-term liabilities. In India, banks usually give 20–30 year home or property loans.
From practical experience, beginners often notice this pattern:
- In early years, most EMI goes toward interest
- Only a small part reduces the principal
- After many years, principal repayment becomes bigger
That is why people say, “initial years of a home loan feel heavy.”
2. Bonds and Notes
Large companies sometimes borrow from investors instead of banks. They issue bonds and pay interest every six months. The main amount is returned later.
For beginners, think of bonds as a big formal loan taken from the public instead of one bank.
Many new business owners look only at sales and profit. But in real life, liabilities decide whether the business can run peacefully.
- Too many short-term liabilities can create cash pressure
- Long-term loans help growth but increase risk
- A healthy balance between both is important
Example
A neighborhood hardware store:
- Suppliers’ bills: ₹50,000
- Salary and electricity dues: ₹50,000
- Total current liabilities: ₹1,00,000 (₹50,000 + ₹50,000)
- Building loan: ₹9,00,000
- Total long-term liabilities: ₹9,00,000
This clearly shows how much money is needed now and how much later. Without this view, profit numbers alone can mislead.
Common Beginner Confusions
From experience, these doubts come up again and again:
- A loan taken to buy an asset is still a liability
- Customer advance is not income
- Unpaid salary is a liability even without a bill
- Credit card dues are also liabilities
Once this becomes clear, reading any balance sheet feels much easier.
Conclusion
Liabilities are not enemies. They are simply commitments to pay in the future. Used wisely, they help a business buy stock, machines, and property and grow step by step.
For most beginners, the biggest learning is this — profit does not mean free cash. Bills and loans must still be paid. Understanding the difference between current and long-term liabilities is the first step to financial confidence.
We hope this article helped you understand Liabilities in a clear and practical way. To continue learning, you may also find our guides on Assets in Balance Sheets
