Liabilities

Published Thursday 23 July 2026

Table of contents

• What are liabilities?
• Types of liabilities
• How to calculate total liabilities
• Examples of liabilities in business
• Liabilities vs. assets
• Liabilities vs. expenses
• How to manage business liabilities
• Track your business liabilities with Xero
• FAQs on liabilities
• Related terms
• Learn more about liabilities

Key takeaways

• Liabilities are debts or obligations your business owes to others, and they sit on your balance sheet alongside assets and equity.
• Current liabilities are due within 12 months, non-current liabilities extend beyond a year, and contingent liabilities depend on a future event.
• Knowing how liabilities differ from assets and expenses helps you read your financial statements and make confident decisions.
• Tracking your liabilities regularly keeps your business financially healthy and supports long-term growth.

What are liabilities?

Liabilities are the financial obligations your business owes to others, including debts, loans, and amounts you're due to pay in the future. They're one of three core elements on your balance sheet, and the accounting equation ties them together: Assets = Liabilities + Equity.

In other words, everything your business owns (assets) is funded either by what you owe (liabilities) or by what you've invested (equity). This relationship is the foundation of double-entry bookkeeping.

For small businesses, liabilities aren't necessarily a bad thing. Taking on a loan to buy equipment or fund growth is common. What matters is knowing what you owe, when it's due, and whether your business can comfortably meet those obligations.

Types of liabilities

Liabilities fall into three main categories, based on when they're due and how certain they are. Knowing which types apply to your business helps you prioritize payments and plan your cash flow.

Current liabilities

Current liabilities are debts due within 12 months. These short-term obligations need attention in the near future and affect your day-to-day cash flow.

Common current liabilities for small businesses include:

• Accounts payable: money you owe suppliers for goods or services already received, covered in more detail under accounts payable
• Wages payable: salaries and wages you owe employees for work already completed
• Short-term loans: business loans or credit lines due within one year
• Income taxes payable: federal and provincial income taxes your business owes
• Sales tax payable: GST, HST, or provincial sales tax collected from customers that you haven't yet remitted
• Unearned revenue: payments received for products or services you haven't delivered yet

Non-current liabilities

Non-current liabilities, also called long-term liabilities, are debts due beyond 12 months. They typically involve larger sums and longer repayment periods.

Examples of non-current liabilities include:

• Long-term business loans: loans with repayment terms extending past one year
• Mortgages: loans used to finance commercial property or real estate
• Bonds payable: debt securities issued by your business to raise capital
• Deferred tax liabilities: taxes owed in the future due to timing differences between accounting and tax rules
• Pension obligations: long-term commitments to employee retirement plans

Contingent liabilities

Contingent liabilities are potential obligations that may or may not become actual debts. They depend on the outcome of a future event, such as a lawsuit or a warranty claim.

For example, if a customer files a lawsuit against your business, the potential payout is a contingent liability. You don't owe anything yet, but you might in the future. Product warranties work the same way: you may need to cover repair or replacement costs, but only if a customer makes a claim.

Businesses usually disclose contingent liabilities in their financial statements without recording them as actual debts. If the outcome becomes probable and the amount is estimable, you'd record it as a real liability under Canadian generally accepted accounting principles (GAAP), which for most private companies means the Accounting Standards for Private Enterprises (ASPE).

How to calculate total liabilities

Your total liabilities are the sum of everything your business owes: total liabilities = current liabilities + non-current liabilities. You can work it out from your balance sheet in a few steps.

1. Add up your current liabilities, such as accounts payable, wages payable, and short-term loans.
2. Add up your non-current liabilities, such as long-term loans, mortgages, and bonds payable.
3. Add the two totals together to get your total liabilities.

Examples of liabilities in business

Seeing how liabilities work in practice makes them easier to understand. Here's what they might look like for a small business.

Imagine you run a landscaping company. At the end of the quarter, your balance sheet shows these liabilities:

• $8,500 in accounts payable to your equipment supplier
• $3,200 in wages payable to your crew for the last two weeks
• $1,800 in sales tax collected but not yet remitted
• $45,000 remaining on a five-year truck loan
• $120,000 on a commercial property mortgage

Your current liabilities total $13,500 (accounts payable, wages, and sales tax). Your non-current liabilities total $165,000 (truck loan and mortgage). Together, your total liabilities are $178,500.

This number on its own doesn't tell you much, so compare it to your total assets. If your business owns $250,000 in assets, you have $71,500 in equity ($250,000 minus $178,500). That means you own about 29% of your business outright, with the rest funded by debt.

Liabilities vs. assets

Assets and liabilities sit on opposite sides of the accounting equation, but they're closely connected. Assets are what your business owns, while liabilities are what your business owes.

Assets include things like cash, inventory, equipment, and property. Liabilities include loans, unpaid bills, and other debts. The difference between total assets and total liabilities equals your equity, or the net worth of your business.

Some assets and liabilities are directly related. When you take out a $50,000 loan to buy a delivery van, you gain a $50,000 asset (the van) and a $50,000 liability (the loan). Over time, the asset may lose value through depreciation while you pay down the liability.

Keeping your assets higher than your liabilities is important. If liabilities exceed assets, your business has negative equity, which can signal financial trouble to lenders and investors.

Liabilities vs. expenses

Liabilities and expenses both involve money going out, but they represent different things. An expense is a cost your business incurs to generate revenue during a specific period, while a liability is an obligation to pay someone in the future.

Expenses show up on your income statement, also called a profit and loss statement. Liabilities appear on your balance sheet. This distinction matters for reading your financial statements and setting a budget.

Here's a practical example. Say you buy a company car for $30,000 with a five-year loan. The loan balance is a liability on your balance sheet.

The monthly interest you pay on that loan is an expense on your income statement, and so is the depreciation of the car over its useful life. Some items can start as one and become the other: when you receive a utility bill but haven't paid it yet, the unpaid amount is a liability (accounts payable), and once you pay it, it becomes an expense.

How to manage business liabilities

Keeping your liabilities under control is key to running a financially stable business. A few practical habits help you stay on top of what you owe.

Start by calculating your debt-to-asset ratio: divide your total liabilities by your total assets. A ratio under 0.5 means less than half your assets are funded by debt, which is generally considered healthy for small businesses. For more on this, see the Xero guide on how to manage debt.

Pay close attention to your current liabilities, since these are due soonest and affect your day-to-day cash flow. Make sure you have enough cash or liquid assets to cover them. If your current liabilities consistently exceed your current assets, your business may struggle to meet short-term obligations.

Consider these strategies for keeping liabilities manageable:

• Negotiate longer payment terms with suppliers to improve cash flow timing
• Refinance high-interest debt when lower rates are available
• Build a cash reserve to avoid taking on unnecessary short-term debt
• Review your liabilities monthly so nothing catches you off guard
• Separate personal and business debts to keep your financial picture clear

If your debt-to-asset ratio climbs above 0.6, or you're regularly struggling to pay bills on time, consider speaking with an accountant or financial advisor. They can help you restructure debt and build a plan to reduce your liabilities over time.

Track your business liabilities with Xero

Staying on top of your liabilities starts with clear visibility into what you owe and when it's due. Xero's cloud accounting software gives you real-time access to your balance sheet, so you can see your current and long-term liabilities at a glance.

With automated bank feeds and smart bank reconciliation, you can track accounts payable, loan balances, and other obligations without manual data entry. Customizable reports help you monitor your debt-to-asset ratio and spot trends before they become problems, and you can get one month free.

FAQs on liabilities

Here are answers to frequently asked questions about liabilities.

Are liabilities the same as debt?

Not quite: debt is one type of liability, but liabilities also include obligations like unpaid supplier bills, taxes owed, and unearned revenue. All debts are liabilities, but not all liabilities are debts.

Is it bad for a business to have liabilities?

No, liabilities are a normal part of running and growing a business, and many are used to fund equipment, stock, or expansion. Trouble arises only when liabilities outpace your assets or your ability to pay them on time.

How do you calculate total liabilities?

Add your current liabilities to your non-current liabilities to get your total liabilities. You'll find both figures grouped together on your balance sheet.

Where do liabilities appear on the balance sheet?

Liabilities appear on their own section of the balance sheet, usually split into current and non-current groups. They sit opposite your assets, and the gap between the two is your equity.

Related terms

• Current liabilities
• Non-current liabilities
• Accounts payable
• Equity
• Assets

Learn more about liabilities

• Guide to assets and liabilities for small business owners
• How to manage debt
• Managing cash flow
• Debt versus equity finance