What are liabilities when it comes to finances? Liabilities are the financial obligations of a business. It can be the result of a business's future sacrifices for financial benefits. At the same time, liabilities can be another option to equity for financing. Liabilities are parts of everyday business operations, including things like income taxes and accounts payable.
While the word liability sounds risky, it can also have some benefits. Liabilities can assist businesses in creating more value and organizing beneficial business operations. However, liabilities must be managed properly. And if they are not, there can be negative results. There may be bankruptcy or a decline in financial profits. Liabilities have a definitive impact on a business's capital structure and liquidity.
The Reporting of Liabilities
Liabilities are outlined on a company's balance sheet as part of the accounting process. The total amount of liabilities should be equal to the difference between the number of assets and the amount of the business's equity. Here are 2 formulas to remember:
Equity + Liability = Assets
Liabilities = Assets - Equity
Liabilities should be reported in compliance with accounting principles. The most popular one is the International Financial Reporting Standards (IFRS). Most countries around the globe use this standard. Even though Russia and the United States use a different standard, its standard is very similar to the IFRS.
Liabilities are put down on the balance sheet when the payment is due and current liabilities are separate from long-term liabilities. The correct classification is important to a company's financial obligations. Current liabilities are considered those liabilities which are due within the next year. They are of a short-term nature and usually managed with the company's liquidity. Liabilities are things like accounts payable, interest payable, income tax payable, accrued expenses, short-term loans, and bank expense overdrafts. Accrued expenses are those that have no invoice. Short-term loans include those loans with less than a year of maturity.
Long-term liabilities exclude anything short-term and are due after more than one year. These types of liabilities can be used for financing. An example would be to fund a business's project. Knowing both short-term liabilities and long-term liabilities helps the business owner understand the capital structure of the business. Long-term liabilities include things like bonds payable, notes payable, deferred tax liabilities, mortgage payable debt, and capital leases.
Bonds payable are outstanding bonds issued for more than one year. Notes payable is a promissory note issued for over one year also. Deferred tax liabilities come from the recognized tax amount and the actual tax amount that was paid to the IRS. Mortgage payable is considered long-term debt and is the value of the principal. Capital leases are usually used for things like the rental of a business's equipment.
If you are uncertain about your company's liabilities, you may want to consider hiring a financial expert. A financial expert will know how to outline all of your short-term liabilities and your long-term liabilities for your balance sheet. This way, you can get a better snapshot of the financial health of your company.