What are Liabilities, and how are they classified?
A liability refers to an obligation or debt that an individual or corporation is responsible for, typically in the form of monetary dues. Entities settle their payables over time by transferring economic benefits such as money, goods, or services. These are debts that are shown on the balance sheet. These encompass debts, outstanding payments, home loans, amounts due for services not yet rendered, and other financial obligations.
Liabilities are the antithesis of assets. They refer to things for which you owe money or have borrowed. You own or are owed assets, which are things.
Key Characteristics
- A liability typically refers to something that is owed to another person.
- A Liability can also refer to a legal or regulatory duty or hazard.
- In accounting, businesses record liabilities against assets.
- Current liabilities are the company's financial obligations that are due within one year or its normal operating cycle.
- The balance sheet lists long-term, non-current liabilities as obligations that are not due for more than a year.
Different Types of Liabilities
Liabilities are divided into two types based on their due dates. Companies must pay current liabilities, which are debts that must be paid soon. Non-current liabilities are substantial but do not necessitate immediate settlement.
Current
Current liabilities are short-term debts and responsibilities that need to be paid within 12 months.
Here are some typical instances of current liabilities:
- Accounts payable: Funds that the business is obligated to pay to others such as creditors, clients, customers, and vendors.
- Short-term loans: Loans with repayment periods of one year or less
- Payments on long-term debt: Installments for substantial loans that have a repayment duration exceeding one year are due, and the outstanding loan balance is categorized as a long-term liability.
- Interest: Unpaid interest on loans
- Accrued liabilities: Any unsettled short-term debts from prior accounting cycles
- Income taxes: Unpaid federal, state, and local income taxes
- Deferred revenue or unearned revenue: Funds that the firm has obtained for products or services it has yet to deliver to the client.
- Commercial paper: Unsecured promissory notes with fixed interest rates used by companies to fund very pressing liabilities like payroll
Non-Current
Non-current or long-term liabilities are debts and obligations due in the future but not in the next year. Some types of non-current liabilities are:
- Bonds: A kind of tradable financial instrument with a defined maturity date (when the full payment is expected) and interest rate.
- Deferred tax: Taxes owed at federal, state, and local levels, not immediately due
- Long-term debt: Principal amounts still owed on loans and other liabilities that are not expected to be paid off within the year, including the remaining balances on installment loans.
- Mortgages: Contracts with creditors that grant them the authority to reclaim the acquired asset if the borrower fails to repay the loan.
- Leases: Remuneration for utilizing someone else's assets or property, like equipment, office premises, and automobiles.
- Pensions: Retirement funds for employees
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