Know Your Liabilities!
Obligations to other people by your business creates liabilities. This means you owe them money or something in return. You need to monitor your liabilities closely and ensure that you are paying them in a timely manner. Types of liabilities include Credit Cards, Security Deposits, Payroll Liabilities, Tax Liabilities, Notes Payable, Retainage, Accounts Payable, etc.
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 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.
About the Author
About the author: Pam Newman Morin, MBA, is a Certified Management Accountant, Author, and Advanced Certified QuickBooks® ProAdvisor. She is the President of RPPC, Inc, which is an Accounting Firm that specializes in QuickBooks® services. For more information: Website is http://rppc.net/ or call 888.536.9690. QuickBooks® and QuickBooks ProAdvisor® are registered trademarks and/or registered service marks of Intuit Inc.
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