KEY POINTS

 What are liabilities in accounting?

 How Do I Know If Something Is a Liability?

 How to find liabilities?

 Examples of liabilities

 How to calculate Total liabilities?

 How to Calculate Current Liabilities?

What are liabilities in accounting?

Liabilities are any debts your company has, whether it’s bank loans, unpaid bills,
IOUs, or any other sum of money that you owe someone else.

If Company promised to pay someone a sum of money in the future and haven’t
paid them yet, that’s a liability.

How Do I Know If Something Is a Liability?

A liability is something that is owed to or obligated to someone else. It can be real
(e.g. a bill that needs to be paid) or potential (e.g. a possible lawsuit).

How to find liabilities?

You can find all of your liabilities on your company’s balance sheet, which is one
of the three major financial statements. (The other two being the income
statement and the cash flow statement.)

All balance sheets are divided into three sections:

1. The assets section, which tells you how much you have.

2. The liabilities section, which tells you what you owe.

3. The equity section, which tells you how much you and other investors have
invested in your business so far.

Examples of liabilities

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Most businesses will organize the liabilities on their balance sheet under two
separate headings: current liabilities and long-term liabilities.

Current liabilities are debts that you have to pay back within the next 12 months.

Long-term liabilities are debts that aren’t due for more than 12 months.

We separate these for two reasons:

1. It makes it easier for anyone looking at your financial statements to figure

out how liquid your business is (i.e. capable of paying its debts).

2. Generally accepted accounting principles (GAAP) require you to do so.

Current liabilities

These are any outstanding bill payments, payables, taxes,unearned revenue, short-
term loans or any other kind of short-term financial obligation that your business
must pay back within the next 12 months.

Some common examples of current liabilities include:

 Accounts payable, i.e. payments you owe your suppliers.

 Principal and interest on a bank loan that is due within the next year.

 Salaries and wages payable in within one year.

 Notes payable that are due within one year.

 Income taxes payable.

 Mortgages payable.

 Payroll taxes.

Long-term liabilities

Also sometimes called “non-current liabilities,” these are any obligations,

payables, loans and any other liabilities that are due more than 12 months from
now.

Some common examples of long-term liabilities include:

 Principal and interest payments due more than a year from now.

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  Bonds, debentures and long-term loans.

 Deferred tax liabilities.

 Lease payments that due for more than a year.

 Mortgage, equipment and other capital payments that due for more than a
year.

What about contingent liabilities?

Some businesses might record a third type of liability on their balance sheets:
contingent liabilities. These are any liabilities you might owe someone, depending
on the result of a lawsuit or if you have to pay your customers back to satisfy the
terms of a warranty, for example.

How to calculate Total liabilities?

Total liabilities simply mean the sum of all the money a business owes to its
creditors. Investors or creditors may want to look into total liabilities to determine
if a company is financially healthy or a good investment.

To calculate total liabilities, check the list of liabilities. Then add up all the ones
that apply to your business to calculate total liabilities.

For example, you may wish to combine:

 Payroll expenses

 Inventory costs

 Costs for rent or building mortgages

 Loans

 Pension expenses

 And more

Once you at all those up, you’ll have the total liabilities or debt obligation for your
company. Investors sometimes examine the total liabilities of the company. They

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compare them against similar companies in the same industry. This way, they can
tell whether the company in question is handling its finances responsibly.

How to Calculate Current Liabilities?

To calculate current liabilities, you need to add together all the money you owe
lenders within the next year (within 12 months or less).

The debt ratio The debt ratio equations is:

Debt ratio = Total liabilities / Total assets

Current Debt ratio = Total liabilities / Total assets

Long-term debt ratio = Long-term liabilities / Total assets

Assets = Liabilities + Equity

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If your assets don’t equal your liabilities and equity, the two sides of your
balance sheet won’t ‘balance,’ the accounting equation won’t work, and it
probably means you’ve made a mistake somewhere in your accounting.

ISLAM HASSAN