Liabilities
are obligations of the company. This means that you are obligated to pay
someone. Types of liabilities include Security Deposits, Retainers, Payroll
Liabilities, Tax Liabilities, Notes Payable, Accounts Payable, Credit Cards,
etc. It is important that you are tracking the right amount of liabilities on
your balance sheet. Too many or too few liabilities on your balance sheet
provide an inaccurate reflection of your business.
Security
Deposits and Retainers should be recorded on your books as liabilities because
you are obligated to perform a service, deliver a product, or return the money
to your client/renter. It does not become income until you have performed the
service or sold the product.
Payroll and tax
liabilities should be recorded with each payroll or sale that you make. These
obligations are accruing and then you remit the money to the appropriate
government tax agency at the necessary time. You should be accruing these
obligations as you go to show that your company is obligated to make these
payments. These payments include State and Federal withholding, Social Security
and Medicare (company and individual portion), unemployment, sales tax, etc.
Notes Payable
are liabilities that your company incurs when you sign a note with a lender for
the purchase of a fixed asset, an operating note, etc. Each time you make a
loan payment, you are paying a portion of the principal (liability) and
interest expense. Do not record the full payment to either of these accounts;
they must be split according to your amortization schedule. You can create an
amortization schedule in your 2004 QuickBooks software or contact your bank for
a copy of the amortization schedule. Depending on the exact date of payment,
your interest can fluctuate but an adjusting entry at the end of the year can
correct any small variances.
Accounts
Payable are those revolving accounts that you have established with your
vendors. Your vendor delivers supplies throughout the month and you pay them at
the end, which creates an obligation on your part. You’ve received the supplies
and are obligated to pay the vendor.
Credit Cards
are also a liability of your company. You should be tracking your credit card
liability on your books to show how much your company owes.
Recording
liabilities at a lower value under values your obligations and overstates your
equity. Overstating your liabilities causes your equity to be under valued.
Neither of these situations is appropriate for your balance sheet.
Your balance
sheet shows your assets (what you own), your liabilities (what you owe) and
your equity (assets-liabilities) in the business. It is imperative that you are
recording your liabilities correctly. Utilizing accounting software such as
QuickBooks can help you with the proper presentation of your balance sheet, but
it is important that you have an accountant help you set up the accounts and
assist you with the proper transactions so that your books are reflective of
your business.
Contact: Pam
is the author of Out of the Red, a Certified Management
Accountant, and a Certified QuickBooks® ProAdvisor. QuickBooks® is a registered
trademark of Intuit. 816.304.4398. www.rppc.net.