How to Record a Liability on a Balance Sheet
Recording liabilities on a balance sheet is a simple task once you've identified the type and source of the liability. A company's general ledger keeps a record of the transactions involving debts and services that are due to be paid. Liabilities are typically recorded under a "payables" account or unearned revenue. They usually have a credit balance, unless they are considered to be a contra liability. This type of liability has a debit balance due to the fact that it discounts or reduces the amount owed. A balance sheet has a section for current and long term liabilities. Any liability that is due within one year is considered to be current.
Determine what type of accounting transaction occurred and what account classifications it might have affected. For example, an airline that receives payments of $1,000 for airline reservations for the following month will record two corresponding transactions. The airline receives an asset (e.g. cash), but also incurs a $1,000 liability for unearned revenue since the actual service (e.g. air transportation) has not been performed yet. In this example, your liability would be $1,000.
Distinguish whether the liability should be classified as current or long-term. Remember that any liability that is to be paid or earned within a year of the transaction is considered to be current. Using the example of the airline's unearned revenue, it is known that the reservations will be fulfilled in the following month. Since this is clearly within a year's time frame, the $1,000 in unearned revenue is considered to be a current liability. If any portion of the $1,000 received were to be fulfilled beyond a year's time, that unearned revenue would be classified as a long-term liability.
Disclose current liabilities under the liabilities section on the balance sheet first. Note that most organizations prefer to list notes payable and accounts payable at the top. Other account classifications are then typically listed in the order of their amount, from high to low. Assuming that the airline accumulates only $1,000 worth of unearned revenue and it is all classified as current, the balance sheet would reflect a category of unearned revenue for $1,000 under current liabilities.
Add each liabilities section on the balance sheet to reflect a total. For example, if you have four categories of current liabilities listed with their separate amounts, you would insert a category labeled "total current liabilities" underneath. Place the total dollar amount to the right of the other individual amounts that are listed. In the case of the airline, assume that they have $30,000 in notes payable and $100,000 in accounts payable listed above the $1,000 worth of unearned revenue. Record $131,000 as your total current liabilities.
Add all of the balance sheet's sections together. Record this amount under "total liabilities" at the bottom of the sheet.
Record lease liabilities on the balance sheet if they entail an agreement to purchase the equipment and incur a payable debt similar to a loan payment.
Record the principle owed for the current twelve months on long-term loans and other long-term debts as a current liability.
Contingent liabilities, such as monies owed as a result of pending lawsuits, should only be recorded on the balance sheet if it is likely that payment will be required.