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.
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
Here are the liabilities on a balance sheet:
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.
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.
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.
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.
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.
1. What Does Account Payable Mean in Current Liability?
Ans: Account payable is the exact opposite of account receivable. This is the money that is owed to the company. The account payable line item will arise when the company receives the service or product before paying for it. The account payable is one of the largest of the current liabilities in a company's balance sheet. This is because the company constantly orders new products or pays off the vendors and suppliers for the merchandise and services. Any well-managed company will aim to keep the account payable high to cover its existing inventory. The existing inventory is included in the balance sheet as assets.
2. What is the Difference Between Current and Long-Term Liability?
Ans: Every business sorts its liabilities into current and long term liabilities. The current liabilities are the payable debts in one year while the long-term liabilities are the debts that get paid over a longer time frame. For example, if any business takes out a mortgage that needs to be paid within 20 years, then this is a long-term current liabilities in the balance sheet. However, if the mortgage payment is due within one year, then this will fall under current liability. The company should be able to pay the current liabilities with cash. The short term liabilities include accounts payable and payroll expenses. If it is a long-term liability, the company should be able to pay it through assets derived from its future earnings. The long term liabilities do not just include the loans and the bonds incurred by the company. It may also include deferred tax assets and liabilities on the balance sheet, rents, pension obligation, and payroll that can get listed in the balance sheet as a long-term liability.