Liabilities
Liabilities are obligations the company owes — debts, bills, and promises that require future cash, goods, or services to settle.
Like assets, they're split into current (due within 12 months) and long-term (due beyond 12 months), listed by maturity — soonest obligations first.
Current Liabilities
Current liabilities are obligations the company must settle within one year.
- Accounts Payable (AP) — Money owed to suppliers for goods or services received but not yet paid. The mirror image of AR. When a company buys inventory on credit, AP goes up.
- Accrued Expenses — Costs incurred but not yet invoiced or paid: wages earned but not yet paid, interest accumulated but not yet due, utilities consumed but not yet billed.
- Short-Term Debt — Borrowings due within a year: lines of credit, commercial paper, short-term bank loans. Used for working capital needs.
- Current Portion of Long-Term Debt (CPLTD) — The slice of long-term debt maturing within the next 12 months.
5-year loan, $100M annual payments. Each year $100M moves from long-term debt into CPLTD — same total debt, just reclassified by timing.
- Deferred Revenue (Unearned Revenue) — Cash collected for goods or services not yet delivered. The company has cash but hasn't earned it yet — it's an obligation to perform.
"When is revenue a liability?" When you've been paid but haven't delivered yet. Cash collected upfront for future service = deferred revenue, a liability. As you deliver, the liability converts to revenue on the IS.
Deferred Revenue: 3-Statement Walkthrough
Tested at Evercore and BofA. The key: cash arrives before revenue is recognized.
Scenario: Company sells a 2-year subscription for $100 upfront. No COGS. Tax rate 20%.
Year 0 (cash collected, no service delivered yet):
- IS: No impact — revenue hasn't been earned
- CFS: Cash in +$100
- BS: Cash +$100, Deferred Revenue (liability) +$100
Year 1 ($50 of revenue recognized):
- IS: Revenue $50, Tax $10, Net Income $40
- CFS: NI $40, Deferred Rev decrease -$50 (already collected this cash last year). CFO = -$10
- BS: Cash -$10 (just the tax payment), Deferred Revenue -$50, Retained Earnings +$40
Running totals: Cash $90, Deferred Rev $50, RE $40. Check: $90 = $50 + $40 ✓
Cash came in Year 0 but revenue waits until Year 1. The only cash leaving in Year 1 is the tax bill ($10). The deferred revenue decrease in CFO offsets the revenue in NI because that cash was already collected.
Long-Term Liabilities
Long-term liabilities are obligations that extend beyond one year.
- Long-Term Debt — Bank loans, term loans, and other borrowings with maturities beyond 12 months (excluding CPLTD). The primary source of debt financing for most companies.
- Bonds Payable — Debt securities issued to investors with a face value, coupon rate, and maturity date. May trade at a premium or discount to par depending on market rates.
- Lease Obligations — Under ASC 842 / IFRS 16, most leases are on the balance sheet. The company records a right-of-use asset and a corresponding lease liability for the present value of future payments.
- Pension and Post-Retirement Obligations — Present value of benefits promised to employees in retirement. If the plan is underfunded (plan assets < obligation), the shortfall is a long-term liability.
Current vs. Long-Term at a Glance
| Current Liabilities | Long-Term Liabilities |
|---|---|
| Accounts payable | Long-term debt |
| Accrued expenses | Bonds payable |
| Short-term debt | Lease obligations |
| Current portion of LTD | Pension liabilities |
| Deferred revenue | Deferred tax liabilities |
Key Takeaways
- Liabilities are listed by maturity — current obligations first, long-term obligations second.
- Accounts payable is the liability counterpart to accounts receivable — goods received, cash not yet paid.
- Deferred revenue is a liability because the company owes future performance, not cash. Understanding this is a common interview differentiator.
- CPLTD is a reclassification of long-term debt into the current bucket as it comes due within 12 months — the total debt balance doesn't change.
- Lease obligations now sit on the balance sheet for most leases, making companies look more leveraged than under old rules.