For example, let's assume that XYZ Company sold $1,000,000 of gift certificates during the holidays. The gift certificates entitle the holders to $1,000,000 of merchandise, and XYZ Company must therefore record a liability for this merchandise. As the gift certificates are redeemed, the company reduces the liability.
Some liabilities are contingent upon the occurrence of other events. For example, XYZ Company may agree to repay the debts of a key supplier if the supplier is unable to do so. This represents a contingent liability for XYZ Company, because it is only liable for the debt if the supplier defaults first. Possible requirements to remedy environmental damage or concerns over the outcomes of some lawsuits are also common types of contingent liabilities.
Accounting liabilities due within one year are generally classified as current liabilities on a company's balance sheet. Liabilities due in more than one year are considered long-term liabilities. It is important to note that although debt commonly comes to mind when one considers liabilities, not all liabilities are debt. Companies may incur several other types of liabilities, including (but not limited to) upcoming payroll, bonuses, legal settlements, payments to vendors, certain derivatives, contracts, certain types of leases, and required stock redemptions. Common balance-sheet categories for liabilities include accounts payable, accrued expenses, and debt.
In business law, liability refers to the responsibility for a company's debt or other obligations. Some forms of business organization, such as a sole proprietorship, have unlimited liability, meaning that the owner is personally responsible for the debts and obligations of the business, and lenders or courts may look to the owner's personal assets for payment of these obligations. Limited liability organizations, such as corporations, allow lenders and courts to only seize the assets of the business rather than the assets of the owners.
