Many people tend to get liabilities and expenses mixed up or think they are interchangeable in accounting. Technically speaking, that is incorrect. Not only are these two items not the same, but they show up on different financial statements and are in separate areas in your Chart of Accounts.
A liability is an amount of money you owe to an individual, a business, or an institution. There are several different kinds of liabilities, such as business loans, lines of credit, payroll taxes (collected but not paid), corporation taxes, etc. Liabilities are also classified as current liabilities or long-term liabilities. This depends on the length of time it takes to pay that liability.
Current liabilities are liabilities that will be paid off within 12 months of the date they were established. Examples of current liabilities are payroll taxes since you collect them for a few pay periods, then usually pay them quarterly to the IRS or state.
Long-term liabilities are liabilities that will take more than 12 months to be fully paid off from the date they were established. A business loan, for example, will most likely be a long-term liability since usually it takes over a year to completely pay it in full.
Liabilities show up on your Balance Sheet. This is also where your Assets and Owner's Equity are listed. Assets and Owner's Equity (Sole Proprietor) will be discussed in another blog post.
I mentioned in the first paragraph, that current liabilities and long-term liabilities are not the same thing. While this is true, I must bring up that a current liability can be moved to a long-term liability and vice a versa. However, this should be done with caution and probably by an accounting professional like a bookkeeper, accountant, or CPA.
An expense is when you buy something for your business and pay for it immediately. There are many different business expenses, but some common examples are office supplies, business meals, postage, utilities, and rent.
Expenses show up on your Profit and Loss Statement. This is also where your Income, Gross Profit, and Net Profit are listed. (Gross Profit, Net Profit will also be discussed in another blog post. So, make sure you keep coming back every Tuesday.)
I am not sure there is much more to say about expenses then that.
If you have any further questions about this or other bookkeeping subjects, please contact me at Rebecca@RHBizSolutions.com. I look forward to talking to you about your bookkeeping needs.
Here's To Your Success!
RH Business Solutions