Liposomes are nanocarriers comprised of lipid bilayers encapsulating an aqueous core. The ability of liposomes to encapsulate a wide variety of diagnostic and therapeutic agents has led to significant interest in utilizing liposomes as nanocarriers for theranostic applications. In this review, we highlight recent progress in developing liposomes as nanocarriers for a) diagnostic applications to detect proteins, DNA, and small molecule targets using fluorescence, magnetic resonance, ultrasound, and nuclear imaging; b) therapeutic applications based on small molecule-based therapy, gene therapy and immunotherapy; and c) theranostic applications for simultaneous detection and treatment of heavy metal toxicity and cancers. In addition, we summarize recent studies towards understanding of interactions between liposomes and biological components. Finally, perspectives on future directions in advancing the field for clinical translations are also discussed.