Are Expenses Liabilities? How Expenses and Liabilities Overlap

You might wonder: Are expenses liabilities? Both expenses and liabilities reflect money moving out of your business, but they represent two different concepts on your financial statements. While expenses are the costs associated with doing business, liabilities are your financial obligations. 

You might use debt (a liability) to cover an expense. For example, the Federal Reserve’s 2026 Report on Employer Firms shows that 56% of small businesses use external financing to meet daily operating expenses. That borrowing creates a liability. Misunderstanding the difference between liabilities and expenses can result in inaccurate bookkeeping, which could affect your tax filings, strategy, and ability to obtain funding. 

Learn more about expenses and liabilities, how they affect your balance sheet and income statement, and when an expense turns into a liability—plus, how Shopify tools simplify expense tracking and financial reporting.

Are expenses liabilities?

No, expenses are not liabilities. They serve different purposes in accounting.

Expenses are costs necessary to generate revenue during a designated period. They are the operational outlays listed on the income statement (also known as the profit and loss statement) for running your day-to-day business, such as buying shipping labels or paying for digital ads. Liabilities are the debts or financial obligations your business owes to external parties in the future, and they appear on the balance sheet.

In other words, an expense is what you spent to make money this month. A liability is what your company owes someone else. These distinctions are hard and fast, although a single transaction can sometimes create an expense and a liability simultaneously.

For example, when a business buys on credit and doesn’t pay cash immediately, it creates an accounts payable liability. The transaction is recorded as an expense on the profit and loss statement, while the unpaid bill sits in a balance sheet liability account until you pay it. In contrast, paying cash right away for items like office supplies means the transaction is an expense, skipping the liability stage.

What is an expense?

In accounting, an expense is defined as the economic value consumed or used to help a business generate revenue. Under the accrual accounting method, expenses are recorded when they occur, not necessarily when cash leaves your bank account.

Expenses are recorded in temporary accounts that reset to zero at year-end. These entries flow directly into the company’s income statement. Expenses reduce your net income and, if they exceed revenue, can result in net losses.

Expenses are classified as operating expenses, which are related to core business activities, and non-operating expenses, which are generally related to the costs of financing or one-off events, like a loss on the sale of an asset. Expenses include:

• Marketing and advertising. Spending on social media ads and print advertising.

• Shipping and fulfillment. The cost of packaging materials, third-party logistics (3PL) fees, and postage.

• Software subscriptions. Monthly fees for your ecommerce platform, accounting software, and email marketing apps.

• Rent and utilities. The cost of leasing a warehouse for storing inventory or paying for electricity to run your operations.

• Insurance. Regular payments for product liability or business property protection.

Every dollar of expense reduces net income and retained earnings, a component of owner’s equity. If your marketing expenses skyrocket without a matching increase in revenue, your net profit and retained earnings shrink, leaving less capital available to invest in business growth.

What is a liability?

A liability is a financial obligation or debt that is owed to an outside entity. Unlike expenses, liabilities don’t disappear at the end of the accounting year. They are permanent accounts recorded on the balance sheet, which displays a company’s liabilities, assets, and owner’s equity.

Settling a liability usually requires transferring cash, providing goods, or performing services. Managing liabilities effectively ensures your business meets its short-term and long-term commitments.

For ecommerce brands, liabilities generally stem from funding inventory, expanding operations, or collecting payments in advance of delivering goods or services. Typical ecommerce examples are:

• Accounts payable liability. Unpaid invoices from suppliers for manufacturing your inventory.

• Business credit card balances. Debt outstanding on a card used to buy ad space or supplies.

• Unearned revenue (or deferred revenue). Money collected from customers for gift cards or product pre-orders where the items haven’t shipped yet. Because you still owe the customer the product, this money is considered a liability until fulfilled.

• Short-term loans. Funding from alternative lenders to purchase inventory.

Current vs. long-term liabilities

Accountants divide business liabilities into two major categories based on when repayment is due:

When do expenses become liabilities?

An expense becomes a liability the moment your business incurs a cost but defers the payment to a later date. Under the accrual accounting method, when you purchase a good or service on credit, you must record the expense on your income statement and a corresponding liability on your balance sheet to reflect the required future payments.

Let’s look at a common scenario for an online apparel brand. Imagine your store hires a freelance graphic designer to create digital ad assets in late December. The designer finishes the work on December 28 and sends their invoice on January 5. Your terms give you until January 30 to pay. The steps to properly record the transaction are:

1. On December 31, you log the design expense on your quarterly income statement because the work occurred in December.

2. Because you haven’t paid the designer yet, you also log that exact amount under accrued expenses (a current liabilities account) on your December balance sheet.

3. In January, when you pay the invoice, your cash balance drops, and the liability account is cleared. However, both the expense and the liability remain in December’s historical data, showing that the cost was incurred and the debt was owed during that period.

How to track expenses and liabilities

To ensure accurate financial reporting and protect your brand’s financial health, keep a clear division between your income statement and your balance sheet.

The Shopify Finance suite directly connects your daily sales performance to your financial operations. This centralized view gives you instant data on your account balances, recent card transactions, and real-time financial updates. If you’re using Shopify Credit to cover marketing costs or Shopify Balance to handle vendor payments, this dashboard shows your liquid current assets alongside your outstanding card balances, giving you an instant look at your short-term financial position.

When it comes time to review financial statements, you can instantly pull dedicated summaries, including:

• Finance summary reports. Top-level data detailing sales, liabilities, and payments over customized timeframes

• Payments and taxes reports. Breakdowns of collected funds and sales taxes owed, simplifying your planning for income taxes

• Gross profit reports. Instant calculations of revenue minus the cost of goods sold

These specialized reports generate data you can export directly into your accounting software. This lets you build a profit and loss statement and balance sheet.