A business can have several types of liabilities, including promissory notes, corporate bonds, wages payable and accounts payable. All of these liabilities are debts that the business has to pay off in the future, but they are not all interest bearing debts. If a company has interest bearing liabilities, it adds the interest payments it makes to the interest expense account on its balance sheet.
Interest bearing liabilities refer to debts that the company has to pay interest to finance even if it plans to pay off the account in less than a month. The company may have to pay interest on trade credit if it waits several months to pay a supplier, and it may have to pay interest on employee paychecks if it does not send them promptly, but the balance sheet classification assumes that the company will not incur these costs.
The business should pay off notes, bonds and other debts that require it to pay interest first. If a liability is not interest bearing, the business does not have an incentive to pay it off quickly. If the business has 30 days to send in a water bill payment before it is late, the business can benefit by waiting 29 days to make the payment, leaving the cash in a money market account or other short term investment in the meantime.
The total value of interest bearing liabilities is smaller than the total value of all liabilities. A business makes certain payments, such as paychecks that its workers receive, periodically even when the workers perform tasks for the company every day, so the business is constantly incurring an obligation to pay wages.
The company only considers interest bearing liabilities when it calculates the expense of debt financing for a project. If the company can finance part of a project by sending in an electric bill or a phone bill a week later, the company does not need to include these liabilities when it considers the size of the loan it plans to take out.
A liability that has no set repayment date, or has an optional repayment date, is not an interest bearing liability. A bicycle manufacturer may establish a warranty account to cover repair costs and returns, which is a liability, but it does not know when it will have to cover a warranty. Dividends payable is not an interest bearing account, because the company can delay paying dividends.
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