The basic accounting equation broadly includes three components: assets, liabilities, and equity. These three components formulate the balance sheet of the company and using these components, and the balance sheet is subsequently prepared. However, within these categories, there are several different subcategories that are included.
For example, assets include Current Assets and Non-Current Assets, and within those categories, there are several different varieties of assets that are included in the balance sheet.
However, as far as liabilities are concerned, they are fairly more complex as compared to assets because they include a variety of different components that define a variety of different tasks.
Total Debts and Total Liabilities are two different things. Regardless of the fact that they both have the same accounting treatment and are representative of the cash outflows of the company (or, in other words, the amount that the company owes), yet they are not the same.
In simple terms, total liabilities are a parent category, and total debt is a subcategory. Calculation of total liabilities includes debt as a component, but it is not the other way around.
As far as total liabilities are concerned, they are defined as the amounts that are due by the company to their suppliers or other various creditors. They are broadly categorized into two main categories, Current Liabilities and Non-Current Liabilities.
Current Liabilities mainly include the payments that the company has to make over the period of 1 year. On the other hand, as far as Non-Current Liabilities are concerned, they are relatively long-term in nature and need to be settled after a period of more than 12 months.
Some of the major examples of liabilities include payments that need to be made to the suppliers, accrued utility bills, as well as long-term contractual loans that the company has taken on. Depending on the timeline of settlement, they are subsequently categorized as Current or Non-Current Liabilities.
A very major component of total liabilities is considered to be debt. Debt can be defined as an amount that the company has undertaken from another organization (in most cases, this organization is a bank) for a specific purpose.
This purpose may vary from firm to firm. It can be for expansionary purposes, or it can also be for other purposes like enabling running finance for the company. It is mostly long-term in nature, but this amount is representative of something that is owned by the company. It is mostly classified as a long-term, non-current debt.
Debt is mostly interest-bearing, unlike other liabilities of the company. Since this is a significant amount that is taken on by the company from an external source, it comes with a financial cost. This financial cost is termed as the interest.
Depending on the agreement between the debt holder and the bank, repayment of the debt can vary from situation to situation. However, generally, the debt is repaid in the form of installments and an interest charge every year.
For the particular year where the installment and the interest charge is supposed to be repaid, the part of the debt is classified as a Current Liability. The remaining portion of the debt, which is due after a period of 12 months, is still categorized as Non-Current Liability.
Therefore, it can be seen that both debt and total liabilities of the company are similar in nature. They have the same accounting treatment and are represented in the same manner on the Balance Sheet. However, total debt is considered to be a part of total liabilities.
In other words, total liabilities include a number of different accruals for the firm, including total debt. Hence, in simple terminology, debt is considered to be a part of total liabilities, but they are not the same thing.
However, they are classified separately on the Balance Sheet because of the fact that external stakeholders (particularly investors and shareholders) look at both liabilities as well as the total debt position of the business.
This helps them to calculate the leveraging position of the company, which helps them to make some major decisions regarding the company. However, they are looked at individually, as well as from an aggregated perspective. Therefore, it can be seen that total debt is considered to be a subcategory of total liabilities.
Debt is considered to be a part of liabilities, but there are several other components that are included as liabilities of the company. However, total debt, more often than not, is considered to be one of the most significant components of total liabilities.