What are liabilities?

What counts as a liability?

Anything the business is obliged to pay or hand over in future. The obvious ones are supplier invoices you have not yet settled and the balance on a loan. The less obvious ones are tax: VAT collected on sales but not yet paid over, PAYE deducted from staff wages and owed to HMRC, and corporation tax on profits already earned. Money a director has lent the company is a liability too, because the company owes it back.

The balance sheet sorts them by when they fall due. Current liabilities are payable within twelve months — trade creditors, VAT, PAYE, the next year's loan repayments, an overdraft. Non-current liabilities are payable later, which usually means the remainder of a loan or a long-term director's loan.

The split matters because current liabilities are what the business must find cash for soon. Compare them with current assets — cash, debtors, stock — and you have working capital, which is the quickest test of whether a business can pay its way.

A worked example

A café draws up its balance sheet at the year end. It owes suppliers £4,200, has £2,600 of VAT due on the next return, £900 of PAYE and National Insurance deducted from staff wages but not yet paid, and a £15,000 bank loan of which £3,000 is repayable in the next year. The owner has also lent the business £5,000 with no plan to take it back soon.

Current liabilities are £4,200 plus £2,600 plus £900 plus £3,000, so £10,700. Non-current liabilities are the remaining £12,000 of the loan and the £5,000 director's loan, so £17,000. Total liabilities are £27,700.

If the café has £14,000 of current assets — cash in the bank, a little stock, a couple of card receipts still to land — its working capital is £3,300. Positive, but not much cushion against a slow month.

Which liabilities get missed?

• —VAT on sales already invoiced. It is HMRC's money sitting in your account, not yours.
• —Corporation tax on this year's profit. It is owed the moment the profit is made, even though payment comes months later.
• —Accrued costs: electricity used but not yet billed, an accountant's fee for work already done.
• —Holiday pay staff have earned but not taken, which is a real cost if they leave.
• —Customer deposits received for work not yet done. Until the work is delivered, that money is owed back.