What are liability accounts?

Definition of liability accounts

Liability accounts are categories within the business's books that show how much it owes.

A debit to a liability account means the business doesn't owe so much (i.e. reduces the liability), and a credit to a liability account means the business owes more (i.e. increases the liability).

Liability accounts are divided into 'current liabilities' and 'long-term liabilities'.

Liability accounts in double-entry bookkeeping

In double-entry bookkeeping, there are five types of nominal accounts:

How debits and credits work for different accounts

To increase the amount in your business accounts, you need to debit some accounts and credit others. What you do depends on the kind of account you’re dealing with:

  • for an income account, you credit to increase it and debit to decrease it
  • for an expense account, you debit to increase it, and credit to decrease it
  • for an asset account, you debit to increase it and credit to decrease it
  • for a liability account you credit to increase it and debit to decrease it
  • for a capital account, you credit to increase it and debit to decrease it

Example of liability account

When a business pays a VAT bill, the amount it owes to HMRC goes down (a debit) and the amount in its bank account also goes down (a credit). The document above shows the transactions in an example "VAT" liability account.

Where to find your liability accounts

Liability accounts appear on the business's balance sheet.

Got questions? Ask Emily!

FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.

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