Liabilities are often confused with other meanings of the word, and the general feeling is that liabilities are 'bad things', when in fact they are part and parcel of every business. Most can't run without them! A liability is basically a promise made by the company to deliver or mean something of value in the future.

For example, if a post office bought a box of envelopes from a stationery supplier, and they were invoiced, then the invoice is a liability: the company has to pay for the envelopes (deliver something of value - in this case, cash) in the future - before the invoice due date. Most credit (and companies can run up credit just like we can on plastic cards!) is classed as a liability.

When liabilities appear on balance sheets, they take two different forms. There are 'accounts payable' - a little like the above example with stationery, but very often they don't have a written invoice for each and every transaction. For example, if the economic climate has caused the company to ask if it can pay for the stationery in one month instead of two weeks, then that's an informal arrangement that can be classed as 'accounts payable'. Much the same can be said of any informal agreement, usually not made in writing, where the company has agreed to make a payment or deliver something of value. These are usually due within a year.

'Notes payable' are the more formal, written agreements that are also due within an accounting year. Bank loans and mortgages are like this - and let's face it, what company these days begins to operate and trade without a start-up loan at the beginning? Another example would be if the company took out a 12 month mobile phone agreement for three phones for the managers - there's a note payable for the rental amount each month, but accounts payable may be the rough amount spent on phone calls above this rental level.

Finally, there are long term debts, and these are exactly what they say on the tin (in fact, some start up loans could be classed as a long term debt, especially if they are not due to be paid in less than a year, hence the long term aspect). Other debts such as a three year lease on the business premises, or rental of plant machinery could also be classed as a long-term debt.

Overall, if you see liabilities on a balance sheet, you should forgive the negative stigma of the word and understand that the borrowing of money or stock is essential to many businesses. Alarm bells may ring, of course, if the liabilities outweigh the assets and equity the company has - we've all heard of companies who make a loss year on year, have debts they can't possibly pay mounting up from one accounting period to the next, and who eventually go bankrupt, not paying their creditors that they have such agreements with. If you watch out for this, then you'll be set to see if liabilities are part of a healthy business, or one bound for the sorry state of administration and liquidation.