How is a Liability an Obligation, and Why Do They Matter?

Liabilities are usually classified as:

• Current liabilities: due within 12 months
• Non-current liabilities: due after 12 months

Common examples of liabilities

• Trade payables (supplier bills owed)
• Taxes payable (e.g., VAT payable, payroll liabilities)
• Wages and salaries owed
• Loans and overdrafts
• Lease liabilities (where applicable)
• Deferred revenue (obligation to deliver services already paid for)
• Accruals (expenses incurred but not yet invoiced)

Why liabilities matter

Liabilities are not automatically “bad”—they are part of normal business financing and operations. What matters is the business’s ability to manage them:

• Liquidity risk
  • Current liabilities must be paid soon; weak cash control can cause missed payments.
• Leverage
  • Excessive borrowing can increase interest costs and restrict flexibility.
• Working capital
  • Payables and accruals affect short-term cash flow and supplier relationships.

Liability management improves when a business has:

• Accurate supplier processing and approvals
• Clear payment calendars and cash forecasting
• Regular reconciliation of payable and tax control accounts

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1. Is deferred revenue a liability?
   Yes. It represents an obligation to deliver goods/services or potentially refund the customer.
2. Are accruals liabilities?
   Yes. Accruals represent expenses incurred but not yet billed/paid.
3. What’s the difference between a liability and an expense?
   An expense is a cost recognised in the P&L. A liability is an obligation on the balance sheet. An expense can exist without a liability (paid immediately), and a liability can exist without an expense (e.g., customer prepayment before revenue is earned).

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