Liabilities to Include in the Balance Sheet
Liabilities are company’s obligations or debts incurred to finance operations. Debts are serviced by transferring services, products, and money. Recorded on the balance sheet, liabilities encompass deferred revenues, accrued expenses, wages, taxes, as well as accounts payable. Deferred revenues are listed as liabilities on the balance sheet until products or services have been delivered. Then they are recorded in the profit and loss statement as revenue. Accrued expenses are recognized as assets or liabilities before they are paid. Accounts receivable and salaries are examples of accruals, which are recorded on the balance sheet. Accounts payable refers to money that is owed to suppliers and creditors. This is a short-term debt that is recorded under current liabilities. Accounts payable are paid off within a specified timeframe so that the company avoids default.
There are different types of liabilities, including short-term and long-term loans, unclaimed dividends, and salaries. Other types include interest and notes payable. In addition, liabilities can be divided into broad categories such as financial, trade, current, and fixed. The latter refer to surplus, reserve, and capital that are due at the time of the company’s dissolution. Long-term liabilities such as mortgages, notes payable, and debentures are not due within the next accounting period. Other examples include post-employment benefits, pensions, deferred income tax, and bonds payable. Loans and other debt instruments with a term of more than 1 year are classified as long-term liabilities. Bonds and leases also fall in this category. Leases come in two varieties – operating and capital lease. Distorters are another variety, which refers to long-term obligations that are moved to current liabilities.
Current Liabilities
They are obligations and debts that are due within the next accounting period. Examples include bank overdrafts, bills payable to vendors and suppliers, sundry, and others. Notes payable, short-term notes, and accounts payable are other examples. Some long-term loans and obligations are also categorized as current. Bonds and other debt instruments that are callable are one example.
Current liabilities show whether companies manage their operating cycles and capital effectively. Financial institutions use the quick or current ratio to see whether a business is able to meet its obligations. Known as liquid ratio and Acid-test, the quick ratio shows the ability of a company to use its quick or cash assets for debt repayment. The current ratio is also called cash asset and liquidity ratio. It indicates whether a company has sufficient resources to meet its obligations within 12 months.
In addition to these types, there are contingent, financial, and trade liabilities. A contingent liability refers to a potential obligation, which will be incurred if a future event occurs. There are two types of contingent liabilities – long-term and current. Examples include outstanding lawsuits, product warranties, fees, penalties, and bills that are discounted before maturity. Financial liabilities are obligations that are incurred for financial purposes. Loans, accounts payable, overdrafts, and derivative liabilities are examples. Finally, there are trade liabilities, which are money owed to suppliers for services and goods. Sundry and bills payable are examples.
Operating Costs
The operating costs of a business include income tax, interest, wages, and taxes. Payroll liabilities are money that companies pay to employees. Money owed to employees and workers are not included in accounts payable. Liabilities include accrued wages and wages and salaries payable. Money withheld from an employee’s pay is paid to government agencies, authorities, and entities. These include insurance plans, deposits in savings accounts, and retirement contributions. The list also includes mortgage payments, child care, and alimony. Alimony, union dues, and garnishments are not tax deductible. Money withheld also includes charitable contributions, and local, state, and federal taxes.
For banks, deposits are liabilities because account holders can withdraw their money at any time. This is the most important category and includes money market deposits, certificates of deposit, and savings accounts. The goal of financial institutions, which are profit-seeking entities, is to reduce costs and boost revenues to acquire profit. Their assets include investment securities, reserves, loans, and physical assets. Examples of liabilities are Federal Reserve loans and transactions deposits such as CDs and others.
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