Liabilities can be specified as a financial obligation of an establishment arising from past transactions or events. Examples of liabilities include accounts payable, deferred revenues, mortgages and accrued expenses.
Liabilities are compensated either through short-term plan or through long-term plan. The size of the debt decides the amount of time required to pay-off the liabilities. Normally, long-term arrangement is adopted while borrowing large amount of money.
Assets = Liabilities + Owner's Equity
Payment procedure
The act of paying liabilities requires the payment of the total sum of amount borrowed. The business establishment furnishes money to the borrowing establishment also charges interest on the amount lent.
Types of Liabilities
Liabilities are basically of two kinds. One is current liability and another is long-term liability.
- Current liabilities: Current liabilities are the financial obligations payable within a short period of time, normally within one year. It is a balance sheet item, which is equal to the sum of dues within one year and all the money indebted to the establishment. Current liabilities are the short-term financial obligations.
Some of the distinguishable examples of current liabilities include accrued expenses as wages, taxes and due interest payments. Some other examples of current liabilities include cash dividends, short-term notes and revenues collected in advance.
Working capital of a company is calculated by subtracting business's total current liabilities from it's total current assets. The current ratio of a business is also calculated by dividing total current assets of the company by it's total current liabilities.
- Long-term liabilities: These are the long-term financial obligations that are not paid off within a year. Long-term liabilities result in the requirement of large amount of money for opening a business or making a purchase of vital assets. Some of the distinguishable examples of long-term liabilities include mortgages, notes, deferred income taxes payable, lease obligations and other post-retirement benefits.
Another kind of liability is the contingent liability. On certain occasions, a company presumes
the possible liabilities for any transaction, event or incident that has already happened. In most of the occasions, it is uncertain to know the size of the financial obligation and the exact time the obligation might have to be met. In the event any legal measure has been taken against the establishment, the contingent liabilities come into play.