Liabilities are something a company or person owes to another party. Liabilities are the obligations a company or business owes to its lenders.
Most companies rely on liabilities as this way they can carry out their transactions and pay when they can. This makes business transactions more efficient. Liabilities can also be in other forms like a tax liability or a legal liability.
Tax liability would be any unpaid taxes that the business owes to the state. Legal liability can be if a party sues the business and the business would now owe them money.
Liabilities Are Portrayed on the Statement of Financial Position:
Liabilities are divided into two categories: current and non-current liabilities. Current liabilities are the dues payable within one year or one accounting period. Paying off current liabilities requires companies to convert some assets to cash.
Non-current liabilities are the debts payable after a year and sometimes over a longer period of time. If a company has taken a 5-year loan with a portion of the loan payable within a year, the current liability would be the amount due within a year and non-current liability would be the amount due after one year.
A company’s current and non-current liabilities are shown in the balance sheet, also known as Statement of Financial Position. Statement of Financial Position shows us the position of a company at a particular date in time.
It shows us the assets, liabilities, and capital of a company. So basically, it reports the resources available to the company, along with obligations and ownership details of the company at a specific date.
Unlike an income statement, which shows the companies transactions over a period of time, the balance sheet shows us the financial position on a specific day of an accounting period, usually the last day.
Current Liabilities and Non-Current Liabilities of business are reported under the liabilities and equity section in the Statement of Financial Position. Some examples of current liabilities are as follows:
- Accounts payable
- Accrued Expenses
- Income tax payable
- Interest payable
- Short term notes payable
- Portion of a long term loan
- Tax payable
- Dividends payable
- Unearned revenue
Non-current liabilities’ examples are as follows:
- Long term loans
- Long term lease obligations
- Bonds payable
- Product warranties
Current liabilities should ideally behalf of the current assets (assets that can be converted into cash within a year), as the current liabilities have to be paid off fast i.e. within a year.
If a company has lots of liabilities, it doesn’t mean that the company is under a huge financial obligation, but it could mean that the company’s main way to conduct business is by taking debts.
If a company’s liabilities are more than assets, the company is under a debt burden.
If the ‘accounts payable’ under the current liabilities keeps on increasing, it means that the company is unable to pay off its short-term creditors.
Many companies rely on these liabilities to finance their short-term assets and everyday transactions and business activities. However, a ratio between liabilities and assets should be maintained so the debtors are paid off easily.