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).
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Liability accounts in double-entry bookkeeping
- Income accounts: what the business has earned
- Expense accounts: the business's day-to-day running costs
- Asset accounts: what the business owns
- Liability accounts: what the business owes
- Capital accounts: what is owed to or by the business owner.
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.