What are liabilities?

Accounting equation shows assets equal the sum of liabilities plus owner’s equity

The accounting equation

Liabilities are present obligations your business has because of past events, which you’ll settle by giving up cash or other resources. In Indonesian, they’re called liabilitas.

Think of a liability as an IOU your business has signed. If a supplier delivers Rp20.000.000 of stock on 30-day terms, you owe that amount until you pay the invoice.

Liabilities are one of the core elements on your balance sheet. The accounting equation links them: Assets = Liabilities + Equity, so everything you own is funded by what you owe or what you’ve invested.

Borrowing to buy equipment or fund growth is a common form of business finance for small businesses. What matters is knowing what you owe and when each amount is due.

Key characteristics of liabilities

An item counts as a liability when it meets four tests. Items that meet all four go on your balance sheet as liabilities.

Present obligation: you owe something now and can’t realistically avoid paying it
Past event: the obligation comes from something that’s already happened, such as receiving stock or signing a loan
Expected outflow: you expect to give up cash or other resources, such as goods or services, to settle it
Measurable amount: you know the amount or can estimate it reliably

Obligations can be legal or constructive. A legal obligation comes from a contract or law, such as a supplier invoice or tax you owe.

A constructive obligation comes from your own established practice or public promise. For example, a long-standing policy of refunding unhappy customers creates an obligation even beyond what the law requires.

Types of liabilities

Liabilities fall into three main groups based on when they’re due and how certain they are. Knowing which ones apply to your business helps you prioritise payments and plan your cash flow.

Current liabilities

Current liabilities are debts due within 12 months, including taxes such as value added tax (VAT), called Pajak Pertambahan Nilai (PPN) in Indonesia. These are the current liabilities small businesses carry most often.

Accounts payable: money you owe suppliers for goods or services you’ve already received
Wages payable: salaries and wages you owe staff for work they’ve already done
Short-term loans: business loans, credit lines or a bridge loan due within one year
Income tax payable: corporate or individual income tax your business owes to the Directorate General of Taxes (DJP)
VAT (PPN) payable: output VAT collected from customers that you haven’t yet paid to the tax office
Unearned revenue: payments from customers for products or services you haven’t delivered yet

Under Minister of Finance Regulation (PMK) 131/2024, the PPN rate is 12%, according to the Directorate General of Taxes. Non-luxury goods and services are taxed on 11/12 of their value, giving an effective rate of 11%, while luxury goods pay the full 12%.

Non-current liabilities

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

Long-term business loans: loans with repayment terms longer than one year
Commercial property loans: loans used to buy offices, shops, warehouses or land
Lease liabilities: payments you owe under long-term leases of property or equipment
Deferred tax liabilities: tax you’ll owe later because accounting and tax rules record income at different times
Employee benefit obligations: long-term commitments such as post-employment and retirement benefits for staff

Contingent liabilities

Contingent liabilities are possible obligations that depend on the outcome of a future event, such as a legal claim or a warranty repair. You don’t owe anything yet, but you might later.

Say a customer takes legal action against your business over a damaged garden. The possible payout is a contingent liability until the case is decided. Product warranties work the same way, since you only pay for repairs if a customer makes a claim.

In Indonesia, Pernyataan Standar Akuntansi Keuangan (PSAK) 237 covers provisions, contingent liabilities and contingent assets; it was renumbered from PSAK 57 from 1 January 2024. Once payment is probable and reliably estimable, you’d record it as a provision under PSAK 237, Indonesia’s equivalent of International Accounting Standard (IAS) 37.

Until then, you disclose a contingent liability in the notes to your financial statements without recording it as a debt. Private businesses may report under SAK Entitas Privat (SAK EP), adapted from IFRS for SMEs, which replaced SAK ETAP from 1 January 2025.

Examples of liabilities in business

Imagine you run a landscaping business in Bandung. At the end of the quarter, your balance sheet shows five liabilities.

Accounts payable: Rp85.000.000 owed to your equipment supplier
Wages payable: Rp32.000.000 owed to staff for work already done
VAT (PPN) payable: Rp18.000.000 collected from customers and not yet paid to the tax office
Truck loan: Rp450.000.000 due after the next 12 months on a five-year loan
Commercial property loan: Rp1.200.000.000 still owing on your yard and office

Your current liabilities total Rp135.000.000 and your non-current liabilities total Rp1.650.000.000, so you owe Rp1.785.000.000 in total. If your assets are worth Rp2.500.000.000, your owner’s equity is Rp715.000.000.

That means equity funds about 29% of your assets, and liabilities fund the rest.

How liabilities show up in your financial statements

Liabilities sit on your balance sheet, and their effects flow through your profit and loss statement and cash flow statement. Each statement shows a different side of what you owe.

Balance sheet

Liabilities appear after assets and before equity on a balance sheet, or on the right-hand side in a two-column layout. The order tells you what’s due soonest.

Current liabilities come first, often starting with accounts payable, followed by non-current liabilities. Each group has a subtotal, then a total liabilities line adds them together.

Below that, equity shows what’s left for the owners. Total liabilities plus total equity always equals total assets, which is a quick check that your books balance.

Profit and loss statement

Your profit and loss statement shows the costs linked to your liabilities, while the debts themselves stay on the balance sheet. These costs include interest on loans and income tax expense.

Accrued expenses also appear here in the period you incur them, before you pay. Repaying loan principal reduces the liability and isn’t an expense, so it doesn’t lower your profit.

Cash flow statement

Your cash flow statement shows how changes in liabilities move cash in and out of your business. Changes in accounts payable and other operating liabilities adjust your operating cash flow, while loan drawdowns and principal repayments sit under financing activities.

Say your accounts payable rises from Rp70.000.000 to Rp85.000.000 over the quarter. The Rp15.000.000 increase adds to operating cash flow, since you’ve received goods without paying cash yet.

If you also repay Rp25.000.000 of truck loan principal, that amount appears as a cash outflow under financing activities.

Liabilities vs assets

Assets are what your business owns, and liabilities are what it owes. Assets include cash, stock, equipment and property; subtract total liabilities from total assets and what’s left is equity.

For example, a Rp500.000.000 loan to buy a delivery van adds a Rp500.000.000 asset and a Rp500.000.000 liability on the same day. Over time, the van depreciates while each repayment reduces the loan, so the two balances move apart.

Keeping total assets above total liabilities keeps your equity positive. Lenders and investors look at this gap when deciding whether to fund your business.

Liabilities vs expenses

An expense is a cost your business uses up to earn revenue in a period, while a liability is an amount you still owe. Expenses appear on your income statement (profit and loss), and liabilities appear on your balance sheet.

Say you buy a Rp300.000.000 company car with a five-year loan. The outstanding loan balance is a liability, while the monthly interest and the car’s depreciation are expenses.

The two often overlap. Under accrual accounting, a Rp4.500.000 electricity bill counts as an expense in the month you use the power. It also sits in accounts payable until you pay it.

Paying the bill settles the liability without adding a second expense. Knowing how debits and credits work helps you record each step correctly.

Financial ratios that use liabilities

Financial ratios compare your liabilities with your assets or equity. They show how much you rely on debt and how easily you pay bills. Each example below uses the Bandung landscaping figures above.

Debt-to-equity ratio

The debt-to-equity ratio compares what you owe with what the owners have invested. A higher ratio means lenders fund more of your business than the owners do.

Debt-to-equity ratio = Total liabilities ÷ Total equity

For the landscaping business, Rp1.785.000.000 ÷ Rp715.000.000 = 2,50. Your liabilities are about 2,50 times your equity.

Debt-to-asset ratio

The debt-to-asset ratio shows the share of your assets funded by debt. A lower ratio means less reliance on debt, though healthy levels vary by industry.

Debt-to-asset ratio = Total liabilities ÷ Total assets

For the landscaping business, Rp1.785.000.000 ÷ Rp2.500.000.000 = 0,71. Liabilities fund about 71% of your assets, which matches the 29% funded by equity.

Current ratio

The current ratio shows whether you can cover bills due in the next 12 months with assets you’ll turn into cash in that time. A result above 1,00 means your current assets exceed your current liabilities.

Current ratio = Current assets ÷ Current liabilities

Say the landscaping business has Rp270.000.000 of current assets, including Rp60.000.000 of inventory and Rp10.000.000 of prepaid expenses. Rp270.000.000 ÷ Rp135.000.000 = 2,00.

The Rp135.000.000 gap between current assets and current liabilities is your working capital, the cash cushion for day-to-day running costs.

Quick ratio

The quick ratio is a stricter test that leaves out inventory and prepaid expenses. Those assets take longer to turn into cash, or can’t be spent on bills at all.

Quick ratio = (Current assets − Inventory − Prepaid expenses) ÷ Current liabilities

For the landscaping business, Rp270.000.000 − Rp60.000.000 − Rp10.000.000 leaves Rp200.000.000. Rp200.000.000 ÷ Rp135.000.000 = 1,48, so your most liquid assets cover short-term debts nearly one and a half times.

How to manage business liabilities

Managing liabilities starts with knowing how much of your business is funded by debt. These steps help you keep repayments under control and your cash flow steady.

Calculate your debt-to-equity and debt-to-asset ratios using the formulas above. Rising ratios mean debt is growing faster than your assets or equity.
Check your current and quick ratios. They show whether you can cover bills due in the next 12 months.
Negotiate longer payment terms with suppliers. Extra days to pay give customer payments more time to arrive.
Refinance high-interest debt when lower rates are available. Lower interest cuts the cost of each repayment.
Build a cash reserve. A buffer covers short-term obligations when customers pay late.
Review your liabilities every month. Adding upcoming repayments to your cash flow forecast helps you spot pressure points early.
Keep personal and business debts separate. Separate accounts keep your balance sheet accurate and your tax reporting simpler.

Tracking your debt ratios also shows your solvency, or your ability to meet long-term debts. If repayments start to stretch your cash, an accountant or financial advisor can help you plan ahead.

Track your business liabilities with Xero

Knowing what you owe, and when, helps you plan with confidence. Xero brings in transactions through automated bank feeds and shows your loan balances and accounts payable in easy-to-read reports.

Start tracking your liabilities in Xero today and get one month free.

FAQs on liabilities

These quick answers cover common questions small business owners ask about liabilities.

What are the 3 types of liabilities?

The three types are current, non-current and contingent. A single loan can sit in two of them, with repayments due in the next 12 months shown as current and the rest as non-current.

Is a liability always bad for a business?

Liabilities are a normal part of running a business. A loan for equipment that earns more than the repayments cost can help you grow, as long as your cash inflows cover what’s due.

How do I know if something is a liability?

Ask whether you owe cash or other resources today because of something that’s already happened, such as receiving stock or taking a deposit. If you can’t avoid paying and can estimate the amount, record it as a liability.

Is accounts payable a liability?

Yes, accounts payable is a current liability made up of supplier bills you’ve received but haven’t paid yet. Paying suppliers on time helps you keep good credit terms.

What is the difference between a liability and a provision?

A provision is a type of liability where the timing or amount is uncertain, such as expected warranty repairs. You still record it on the balance sheet, using your best estimate of what you’ll pay.

What are examples of personal liabilities?

Personal liabilities include a home loan (Kredit Pemilikan Rumah, or KPR), a car loan, credit card balances and personal income tax owed. Keep these apart from business liabilities so your balance sheet shows only what the business owes.

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Disclaimer

This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.

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