What are Liabilities?
Most companies have at least some form of debt or obligation(s) as part of starting their business and running it.
The Liabilities section of the Balance Sheet reflects these debts and obligations.
Amongst others, these obligations can arise if
- a company buys products from vendors on credit
- it takes and financing from banks
- it uses services and pays for them at later dates
Similar to Assets in the Balance Sheet, a company Liabilities are categorized into Current Liabilities and Long Term Liabilities.
Accountants present the Short and Long Term Liabilities separately to enhance user readability and help users assess the financial strength of a company in both the short and long term.
Current Liabilities
Current Liabilities are a company debts or obligations that are due within 12 months.
Typical Current Liabilities found on a Balance Sheet are
Long Term Liabilities
Long Term Liabilities are debts and obligations of a company that are due after a year or more.
A few examples of typical Long Term Liabilities are
Bonds Payable
Many Larger companies raise money through the issuance of Bonds.
What are Bonds you ask?
Bonds are a fancy term for IOU's from Institutions such as Governments, Corporations etc.
Companies have many ways of raising money.
Often, bigger companies, cities and even governments raise money from sources other than banks by issuing bonds to the normal public.
In return they promise to pay back he borrowed amount in full with regular interest payments.
This Debt is classified as Bonds Payable in the Balance Sheet and you can read more about it by clicking here.
Long Term Loans
Like individuals, Businesses borrows money from banks to finance their ongoing business needs.
These loans may have been taken to finance vehicles, purchase machinery and equipment for the business or as a mortgage to purchase a building amongst many others.
When the repayment on this debt exceeds a year, the amount is recorded as long term loans (or Notes Payable) in the Balance Sheet.
Conclusion
- The Liabilities of a company are the debts and obligation(s) of a Business.
- They appear in a Financial Statement called the Balance Sheet.
- Liabilities are classified into Current and Long Term Liabilities.
Further Thoughts
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