Accounting for Liabilities

When you incur a debt, the debt amount is recorded as a liability and appears as such on your company financial statements. The value you receive in exchange for the liability can increase your assets or your expenses.

For example, if you borrow $10,000 and receive cash, the following accounts could be affected:

	Debit	Credit
Cash	$10,000
Note Payable		$10,000

If you purchase an asset such as a vehicle, with a cash down payment, and you take out a loan to finance the balance of the purchase, the transaction might affect your accounts in this way:

	Debit	Credit
Fixed Assets/Vehicle	$22,000
Cash		$5,000
Vehicle Loan Payable		$17,000

If you make a $265 purchase of office supplies from your local supply store and you receive a bill for the supplies, these accounts are affected when you record the receipt of goods and the bill:

	Debit	Credit
Office Expenses	$265
Accounts Payable		$265

When you issue a check to the office supply store to pay the bill, here's what happens:

	Debit	Credit
Accounts Payable	$265
Cash		$265