Before we delve into understanding the liabilities on the balance sheet let us first understand what liability means. Liability is something that is owned by a company or a person which is usually a sum of money. The liability gets settled with time through the transferring of economic benefits. Liabilities are recorded on the balance sheet's right-hand side, which includes accounts payable, bank loan current liabilities, bonds, deferred revenues, and accrued expenses.
Liability is thus an obligation between two parties. In the financial world, liability is defined mostly by previous business events, transactions, exchange of assets, and sales. It is anything else too that would provide an economic benefit at a later stage. Let us understand accounting assets and liabilities.
Liabilities could be current or non-current, and the balance sheet includes the list of current assets and current liabilities. This includes any future service that is owned, which could be short or a long-term bank borrowing or any previous transaction that may have created any unsettled obligation. Accounts payable and bond payable are the common kinds of liabilities, and these two would usually be seen in a company's balance sheet as these are a part of the long-term and current operations.
Liabilities are a Part of Business
Businesses need to operate, and for this, it needs resources. The resources are not for free, and the business will need money to finance it. The owner receives finance through banks, investments, and other institutions. The company balance sheet assets and liabilities are a depiction of the financial position, which are the example of assets and liabilities and the capital of the entity at the financial year-end. The balance sheet also shows the source from where the fund is received and its application. The sum of the liabilities and the capital must be equal to the assets
Understanding the Liabilities on a Balance Sheet
Here are the liabilities on a balance sheet:
Capital
The amount that the owners of the business contribute towards the business is the capital. The owner may contribute the capital either at the start or late in the business as per the fund requirements. Any contribution that the owner makes through capital into the business counts as the liability. Capital includes the current and fixed assets as well as any kind of cash. The capital of the business can be a fixed or working capital. The working capital is the excess of the assets over the current liabilities. The fixed capital cannot be used for the day to day running of the business activities. The building, cash in the bank, bank liabilities and assets, and cash at hand all count as business capital.
Reserve and Surplus
Business is ongoing, and the entity will make profits as well as losses through the business cycle. The accumulation of profit or losses will increase or decrease the equity and capital of the owner.
Long Term or Non-Current Liabilities
These are the liabilities that need to be settled over a longer time period. The business will be able to raise long-term funds through financial institutions and loans from a bank. The repayment of the loan will be done in installments through the loan tenure. The business will raise this fund to procure any fixed assets. Any long term fund cannot be used to run the day to day operations. These long term loans are secured.
Short Term or Current Liabilities
The short-term liabilities are those that need to be redeemed shortly. This could be the trade payable, bills payable, bank overdraft, contingent liabilities in the balance sheet etc. Liability will fall under current liability if it needs to be settled in the normal operating cycle, which is within 12 months.
Facts- What Comes Under Current Liability?
Here is what comprises the list of current assets and liabilities:
Sundry creditor which is the amount payable to the supplier of the goods.
Advances from customers are where some clients make payments in advance for their goods.
Outstanding expense are the expenses of those who have availed of the service, but the payment is still pending.
Bills payment is where the supplier does not give any credit without security.
Bank overdraft may give an overdraft facility to the business entity.
FAQs on Liabilities on the Balance Sheet: Types and Examples
1. What are liabilities in accounting?
In accounting, a liability is a financial obligation or debt that a company owes to another person or entity. These are claims against the company's assets. In simple terms, liabilities represent what the business owes. They are settled over time through the transfer of economic benefits, including money, goods, or services.
2. What are the main types of liabilities shown on a balance sheet?
Liabilities on a balance sheet are primarily classified into two main categories based on their due date:
- Current Liabilities: These are debts or obligations that are due within one year or one operating cycle of the business.
- Non-Current Liabilities (or Long-Term Liabilities): These are obligations that are not due for settlement within one year. They represent a company's long-term financial commitments.
3. Can you give some common examples of current and non-current liabilities?
Certainly. Common examples help clarify the difference:
- Examples of Current Liabilities: Accounts payable, salaries payable, short-term loans, accrued expenses, and income tax payable.
- Examples of Non-Current Liabilities: Long-term bank loans, bonds payable, debentures, and deferred tax liabilities.
4. What exactly are 'accounts payable' and why are they a current liability?
Accounts payable represents the money a company owes to its suppliers or vendors for goods or services purchased on credit. They are considered a current liability because this amount is typically expected to be paid back within a short period, usually 30 to 60 days, which is well within the one-year timeframe.
5. How are liabilities different from assets on a balance sheet?
The main difference is what they represent. Assets are resources that a company owns and that have future economic value (e.g., cash, inventory, machinery). In contrast, liabilities are what a company owes to others (e.g., loans, supplier payments). The relationship between them is defined by the fundamental accounting equation: Assets = Liabilities + Equity.
6. Why is it important for a business to correctly classify its liabilities?
Correctly classifying liabilities as current or non-current is crucial for understanding a company's financial health. It helps stakeholders, like investors and creditors, assess the company's liquidity—its ability to meet short-term obligations. A high amount of current liabilities compared to current assets might indicate potential cash flow problems.
7. Where are liabilities listed in the standard balance sheet format?
In a standard balance sheet, liabilities are listed on the right side, under the heading 'Equity and Liabilities'. Typically, current liabilities are listed first, followed by non-current liabilities. This entire side must balance with the 'Assets' side, which is listed on the left.
