What is a Liability Account?

A liability account is used to store all legally binding obligations payable to a third party. It contains the amount of each liability formally recognized by an organization, including liabilities for goods received on credit, bank loans payable, compensation payable, and so forth. Liability accounts appear in a firm’s general ledger, and are aggregated into the liability line items on its balance sheet.

The Structure of a Liability Account

The natural balance of a liability account is a credit, so any entries that increase the balance of a liability account appear on the right side of the journal entry. Conversely, a debit reduces the balance of a liability account. A liability account is sometimes paired with a contra liability account, which contains a debit balance. When combined, the liability account and contra liability account result in a reduced total balance.

Examples of Liability Accounts

Samples of the types of liability accounts that a company may use are accounts payable, accrued liabilities, deferred revenue, interest payable, notes payable, taxes payable, customer deposits, and wages payable. Other liability accounts are more specific to certain industries.

Liability Account Classifications

Liability accounts are classified within the liabilities section of the balance sheet as either current liabilities or long-term liabilities. Current liabilities are scheduled to be payable within one year, while long-term liabilities are to be paid in more than one year.

The Debtor and Creditor Classifications

Whenever a business records an obligation in a liability account, it is known as the debtor. The third party to which the obligation must be paid (such as a supplier or lender) is known as the creditor.