Financial Statement Series: Unique Liabilities: The Lesser-Known Liabilities Lurking in Your Balance Sheet
- Rylan Kaliel
- Jul 18
- 5 min read
We have covered the basics of the Balance Sheet in a previous blog and have walked through the various sections that make up the said statement. As you will remember we covered the following sections,
Current assets, current liabilities, capital assets and long-term liabilities and went through the common accounts you can expect to see under each of these segments. In this blog we will cover more niche and unique liabilities that you are likely to see as your business grows and becomes more complex.
Please keep in mind that not every business will have each an everyone of the liabilities we will discuss below, however, knowledge is power and if you do come across these, you will now have a better understanding of how to deal with them.
Deferred Revenues: The Umbrella of Unearned Cash
Anytime you take money before delivering the goods or services, you’ve got deferred revenue—a liability until you do your part. There are a lot of instances where this will come into play. Below we will look at some brief examples of what deferred revenue is and then we will discuss the some of the more common areas of deferred revenue in depth.
Examples
Magazine Subscriptions: Get paid for a year, recognize revenue as you deliver each issue.
Software Licenses: Prepaid annual licenses? Spread the revenue recognition over the year.
Event Tickets: Money in hand before the big day? That’s deferred revenue until the event is over, and the confetti is swept up.
How Warranties Work
Definition: A warranty liability is the expected cost of keeping your promise. Estimated and recorded at the time of sale. This where your expertise comes in as you need to estimate what percentage of the products you sell will need repairs and how much these repairs on average will cost you. If this a new product for you, it would be a good idea to do research on what the industry averages for product breakdown and repairs would be.
Example: Sell 500 fancy toasters with a 1-year warranty. If an estimated 4% will break down, costing $15 each to fix, set aside $300 (500 x 4% x $15) as a liability at the time of the sale.
Why: This keeps your business honest—your financial statements and accounts will show the true state of the affairs, and you won’t be blindsided with the expenses when the time comes.
Warranties: Promises with a Price Tag
Ever offered “one year, no worries” with your products? Warranties make customers happy and accountants busy. If you promise to repair or replace products for a certain period, you’re also promising to set aside cash for when those products inevitably need to be worked on.
Gift Cards: The Money You Haven’t Earned (Yet)
When you sell a gift card, you have not earned the money from it yet because you have not provided the promised upon services that the gift card represents.
What to Know About Gift Cards
Definition: Gift cards are prepaid obligations. Money received, goods/services still owed.
Example: You sell $1,000 in gift cards in December for pedicures. Until used, that’s $1,000 in liabilities. When redeemed, you move the amount to revenue.
Issue: There are some cards that are lost or never redeemed. What do you do in that case. Well according to accounting principles, you can record them as revenue after a reasonable amount of time has passed. The reasonable amount of time is based on historical data. Let’s say historically if a gift card is not redeemed after 2 years, then it generally will never be redeemed, you could use that period as the reasonable amount of time. You can also sell gift cards that have expiry dates to make it easier to track them and clear up any ambiguity surrounding recording the revenue in the future.
Season Passes: Money Now, Services Later
Season passes are like a membership to the “fun club”—you get cash upfront but owe the member experiences through the year or the period of time that the pass is valid for.
The Season Pass Rundown
Definition: Prepaid access to services over time = liability until earned.
Example: Your climbing gym sells 200 yearly passes at $400 each—$80,000 cash in January! But these are for a year, so you only count $6,666 ($80,000/12) as revenue per month, as customers use their passes.
Contingent Liabilities: The “Maybe, Maybe Not” Club
Contingent liabilities are the “what ifs” of accounting. They might become real liabilities; however you are not a hundred percent sure that they will.
Decoding Contingent Liabilities
Definition: Potential obligations based on future events—think lawsuits, environmental fines, or guarantees you’ve made.
Example 1: You’re sued by a rival bakery over your “secret ingredient.” If it looks likely you’ll lose (and you can estimate the cost), record a liability.
Example 2: Guaranteed a loan for your cousin’s alpaca farm? If the cousin can’t pay, you might have to step in—so consider it a contingent liability.
How to Record: Only book it if the event is probable and you can estimate the cost. Otherwise, it’s a footnote.
Impairment of Assets: When Value Takes a Hit
Sometimes, your assets aren’t worth what you though it was worth.
What Does Asset Impairment Mean?
Definition: When an asset’s market value drops below what’s listed on your books and it’s not expected to recover, you “impair” it (write down its value).
Example 1: That delivery van you bought for $20,000 is now only worth $8,000 after new city emissions rules. Write down $12,000 as an impairment loss.
Example 2: You invested in a line of hoverboards, but safety recalls tanked their value. You need to revalue your inventory lower on your Balance Sheet.
Why should you care? Impairment losses reduce your profit but give a more accurate picture of your business’s health. Pretending assets are worth more than they are just leads to rude awakenings down the line.
Bad Debt Expense: When “I Owe You” Turns into “I Owed You”
Bad debt expense is the heartbreak of business—when customers don’t pay up, and you finally give up the hope that they will pay.
The Bad Debt Breakdown
Definition: Money you expected to collect from customers but now realize is lost forever. Time to write it off!
Example 1: You built a website for a local pizzeria. Six months and 10 ignored invoices later, you accept you’ll never get paid. That’s bad debt expense.
Example 2: You gave store credit hoping for loyalty, but some customers disappear faster than your limited-edition muffins. Their balances become bad debt.
How to Handle: Write off the amount in your books. It hurts, but it means your income is more realistic.
Conclusion: Unique Liabilities, Your Balance Sheet’s Secret Society
From deferred revenue to contingent liabilities, from gift cards to bad debt, each of these Balance Sheet accounts tells a story about promises made and risks taken. Understanding these not-so-obvious liabilities keeps your finances honest and your business better prepared for surprises. So, next time you glance at your Balance Sheet, give a nod to all its unique club member.
In the next blog we will discuss unique assets, the happier twin to unique liabilities.
KLV Accounting, a Calgary-based accounting firm, is here to help. Contact us today to enhance your financial strategy, minimize your taxes, and drive business success! For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.
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