Several business transactions can affect the liability account. Here are a few key examples:
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Borrowing Money: When a business takes out a loan from a bank, it incurs a liability. This transaction increases the liabilities on the balance sheet because the business is obligated to repay the loan.
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Purchasing on Credit: If a company buys inventory or supplies on credit, it incurs accounts payable, which is a liability. The transaction increases the liabilities as the business has an obligation to pay the supplier.
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Issuing Bonds: When a corporation issues bonds to raise capital, it creates a liability since it must repay the bondholders at a future date.
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Acquiring Equipment with a Financing Agreement: If a company purchases equipment and finances part of the cost, it would record a liability for the amount that needs to be paid over time.
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Accruing Expenses: If a business incurs expenses that have not yet been paid (like wages or utilities), it would record these as accrued liabilities, increasing the liability account.
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Deferred Revenue: When a company receives payment in advance for services or products to be delivered in the future, it records this as a liability. It represents an obligation to deliver goods or services in the future.
Each of these transactions directly affects the liability account on the balance sheet, showing the company's obligations to outside parties.
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