Business accounting provides small business owners with a way to track their liabilities and expenses- which both represent an outflow of funds. An expense is incurred in the current period to generate revenue, while a liability is a financial obligation that will be settled in the future.
If your small business is in or near Cincinnati, let Orcutt and Co. handle your small business finances. We specialize in day-to-day bookkeeping and accounting tasks, as well as payroll and tax prep. We can help you determine which payables qualify as small business liabilities and which ones qualify as expenses.
What Is The Difference?
A small business liability is a financial obligation to be settled in the future. An expense is a cost incurred in the current period in an effort to generate revenue. Below, we’ll explore each of these in detail:
Small Business Liability
A small business liability is recorded on your company’s balance sheet. They are categorized into long-term or short-term, depending on the terms of the liability. A long-term liability is one that is owned for more than 12 months, while a short-term liability is owned for less than 12 months.
Some of the most common small business liabilities include:
- Bank overdrafts
A liability allows your business to obtain benefits now that will be paid for in the future, which means you can continue running your business and expanding, even if you’re not able to pay for it right now.
As a small business owner, it is critical to keep liabilities under control and make sure you have sufficient assets to cover them in case of liquidation, so that you will have the assets to pay off your obligations.
Small Business Expense
On the other hand, small business expenses are the costs incurred in daily business activities. An expense is a cost incurred in the current period, with payment made when the expense is incurred. This is recorded in your company’s income statements, reducing your profitability.
Some common examples of business expenses include:
- Utility bills paid
Business owners must keep an eye on their expenses to ensure they are not increasing, especially during slow periods and revenue drops. This helps to ensure that your company doesn’t end up with a loss at the end of the period.
The Difference Defined
Both small business liabilities and small business expenses represent outflows of funds and must be included on the financial statements. The primary difference is the timing they are paid. Expenses are paid when they are incurred and reduce the profitability of the business for the period. Liabilities are obtained now but paid on a future date. Both are highly important for a business in that liabilities must be controlled so that the business assets can cover them, and expenses need to be controlled so that it doesn’t reduce profitability.
Let Us Help!
Let Orcutt & Co. help your Cincinnati-based small business keep track of liabilities and expenses. We can help you keep track of your day-to-day financials, as well as payroll and tax prep. We are a third-generation family business that has been helping small businesses, entrepreneurs, and families for more than three decades. We look forward to helping you with your small business financials.