4 Types of Liabilities

Assets represent the property of the business, whereas liabilities represent the claims of the business. In this article, we will talk about the Types of Liabilities.

Types of Liabilities

Capital: This is the amount that is invested by the proprietor in the business to carry out the various business activities. Items that increases the balance of capital such as net profit, fresh capital introduced and interest on capital are added to this capital. On the other hand, the items that reduce the balance of capital such as net loss, drawings made, interest on drawings, income tax paid, life insurance premium, etc. are deducted from this capital.

Fixed Liabilities: These are the long-term liabilities of a business that are to be repaid by the business after a period of one year. For example, long-term loans, loan from bank, mortgage loan, etc.

Current Liabilities: These are the short-term liabilities of a business that are to be repaid by the business within a period of one year. For example, creditors, bills payable, outstanding expenses, etc.

Contingent Liabilities: These are the liabilities that depends on the happening of some certain event. These are not the actual liabilities, but may become liability in the future on the happening of some specific event. For example, liability in respect of bill discounted is a contingent liability. This is because, if a sole proprietor discounts a bill with bank and on the
actual date of payment, the acceptor fails to pay the amount, then, the sole proprietor will become liable to the bank. These liabilities are not shown in the Balance Sheet but are shown as a footnote below the Balance Sheet.

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