What are liabilities and how do they affect your business?

Published Thursday 23 July 2026

Table of contents

• What are liabilities?
• Types of liabilities
• Examples of liabilities
• Liabilities vs assets
• Liabilities vs expenses
• How liabilities affect your business
• How to track liabilities
• Keep on top of your business liabilities with Xero
• FAQs on liabilities

Key takeaways

• Liabilities are financial obligations your business owes to others, including loans, unpaid bills, GST collected, and superannuation payable.
• Current liabilities are due within 12 months, while non-current liabilities extend beyond a year.
• Tracking your liabilities helps you understand your true financial position and plan cash flow with confidence.
• Accounting software like Xero makes it easier to monitor liabilities through real-time balance sheet reporting.

Every business carries some form of financial obligation. Understanding your liabilities is essential for making informed decisions and keeping your finances on track.

What are liabilities?

Liabilities are amounts your business owes to other parties. They represent financial obligations that need to be settled over time, whether that's paying a supplier invoice, repaying a bank loan, or remitting GST to the Australian Taxation Office (ATO).

In accounting, liabilities are a core part of the accounting equation: Assets = Liabilities + Equity. This means everything your business owns (assets) is funded either by what you owe (liabilities) or what you've invested (equity).

Most businesses carry liabilities as a normal part of operating. Taking on a loan to buy equipment or receiving goods on credit are common examples. The key is understanding what you owe and when it's due.

There are several categories of liabilities, each with different characteristics and timeframes.

Types of liabilities

Liabilities fall into 3 main categories based on when they're due and how certain they are. Knowing the difference helps you plan your cash flow and meet your obligations on time.

Current liabilities

Current liabilities are debts and obligations due within the next 12 months. These are the day-to-day financial commitments that keep your business running.

Common current liabilities include:

• accounts payable (money owed to suppliers)
• wages and salaries payable
• GST collected but not yet remitted to the ATO
• PAYG withholding obligations
• superannuation payable
• short-term loans or credit card balances
• income tax payable

Because current liabilities are due soon, they have the most direct impact on your cash flow. You need enough working capital to cover these as they fall due.

Non-current liabilities

Non-current liabilities are obligations that extend beyond 12 months. These typically involve larger amounts and longer repayment periods.

Examples of non-current liabilities include:

• long-term business loans
• commercial mortgages
• equipment finance agreements
• long-term lease obligations

While non-current liabilities don't put immediate pressure on your cash flow, they do affect your overall debt position. Lenders and investors look at your non-current liabilities to assess your long-term financial health.

Contingent liabilities

Contingent liabilities are potential obligations that depend on the outcome of a future event. They may or may not become actual debts.

Examples include product warranties, pending legal disputes, or guarantees you've provided for another party's loan. You disclose contingent liabilities in the notes to your financial statements rather than recording them as debts on the balance sheet.

Understanding the different types of liabilities gives you a clearer picture of what your business owes. Here are some practical examples you might recognise.

Examples of liabilities

Liabilities show up across many areas of a small business. Here are common ones you're likely to encounter as an Australian business owner:

• accounts payable: invoices from suppliers for stock, materials, or services
• bank loans: funds borrowed to purchase equipment or expand your business
• GST collected: the goods and services tax you collect from customers and owe to the ATO
• superannuation payable: the super guarantee contributions you owe on behalf of your employees
• PAYG withholding: income tax withheld from employee wages that you remit to the ATO
• credit card balances: amounts owing on business credit cards
• commercial rent: lease payments owed to your landlord

Keeping track of when each obligation is due helps you avoid late payments and penalties.

Liabilities are just 1 part of your financial picture. It helps to understand how they relate to your assets.

Liabilities vs assets

Assets and liabilities sit on opposite sides of your balance sheet. Understanding both is central to knowing your financial position.

Assets are what your business owns or is owed: cash, equipment, stock, and accounts receivable. Liabilities are what you owe to others. The difference is your equity (also called net assets). If your assets total $200,000 and liabilities are $80,000, your equity is $120,000.

Liabilities are also sometimes confused with expenses. While they're related, they're not the same thing.

Liabilities vs expenses

Expenses and liabilities are both costs your business incurs, but they appear in different places in your financial records.

An expense is a cost you incur to generate revenue. It appears on your income statement and reduces your profit for the period. A liability is an amount you owe but haven't yet paid, and it sits on your balance sheet.

When you receive a supplier invoice, you record both an expense (the cost) and a liability (the amount owing). Once you pay the invoice, the liability is cleared. In short, expenses affect your profitability while liabilities affect your financial position.

Beyond the accounting definitions, your liabilities have real, practical effects on how you run your business day to day.

How liabilities affect your business

Your liabilities directly influence your cash flow, borrowing capacity, and overall financial stability. Staying across them helps you make better business decisions.

When current liabilities are high relative to your available cash, you may struggle to pay suppliers on time or cover employee wages. Monitoring your current liabilities alongside your cash position helps you spot potential shortfalls early.

Lenders also look at your liabilities when you apply for finance. A high debt-to-equity ratio can make it harder to secure funding. Keeping your liabilities manageable strengthens your position when you need to borrow. Understanding your liquidity and solvency gives you a fuller picture of your financial health.

For tax obligations like GST and PAYG withholding, missing due dates can result in penalties from the ATO. Setting up regular reminders or automating payments helps you stay compliant.

Knowing how liabilities affect your business is 1 thing. Having a reliable system to track them is another.

How to track liabilities

Accurate tracking of your liabilities gives you a clear view of what you owe and when payments are due. Here are practical steps to stay on top of them.

1. Review your balance sheet regularly

Your balance sheet shows all current and non-current liabilities at a point in time. Reviewing it monthly helps you spot trends, such as growing supplier debt or increasing loan balances. You can use a balance sheet template to get started, or with Xero's accounting software, your balance sheet updates in real time as transactions flow through.

2. Reconcile your accounts

Bank reconciliation matches your accounting records against your bank statements to ensure all obligations are accurately recorded. Xero's bank reconciliation pulls in bank feeds automatically, making the process faster.

3. Stay on top of accounts payable

Keep track of all supplier invoices, their due dates, and payment terms. Using bill payment features in your accounting software helps you schedule payments and avoid late fees.

4. Monitor your tax obligations

GST, PAYG withholding, and superannuation all have specific due dates. Set up reminders or use your accounting software to track these obligations so you lodge and pay on time.

5. Get professional advice

If your liabilities are growing or you're unsure how to manage them, speak with an accountant or bookkeeper. Learning the basics of small business accounting can also help you feel more confident managing your finances. You can find an advisor through Xero's advisor directory.

Keep on top of your business liabilities with Xero

Tracking your liabilities doesn't have to be complicated. Xero gives you a real-time view of what your business owes, from supplier invoices and loan repayments to GST and superannuation obligations.

With automatic bank feeds, built-in reporting, and easy-to-read dashboards, you can monitor your financial position without spending hours in spreadsheets. Stay on top of your liabilities and make confident decisions about your business. Get one month free.

FAQs on liabilities

Here are some frequently asked questions about liabilities and how they apply to your business.

What is an example of a liability?

A common example is accounts payable, which is money you owe to suppliers for goods or services received. In Australia, GST collected from customers that you haven't yet remitted to the ATO is another everyday liability for small businesses.

What is the difference between current and non-current liabilities?

Current liabilities are due within 12 months, such as supplier invoices and tax obligations. Non-current liabilities have a repayment period longer than 12 months, such as business loans or commercial mortgages.

Are liabilities bad for a business?

Not necessarily. Most businesses carry liabilities as a normal part of operating. Taking on a business loan to invest in growth can be a smart decision, as long as you can comfortably manage the repayments alongside your other obligations.

How do liabilities appear on a balance sheet?

Liabilities are listed on the right side of the balance sheet, separated into current and non-current categories. Your total liabilities, combined with equity, equal your total assets under the accounting equation.

What is a contingent liability?

A contingent liability is a potential financial obligation that depends on the outcome of a future event, such as a pending legal claim or a product warranty. It's disclosed in the notes to your financial statements rather than recorded as a debt on the balance sheet.