Liabilities are a main component of a company’s balance sheet.
What Are Liabilities?
Liabilities are what’s owed by an individual or a company. They are—in accounting terms—a company’s present obligations, originating from past transactions, through which economic benefits are expected.
In other words, liabilities are a source of funding usually in the form of debt or borrowing from another party that can be used to purchase assets or finance operations. Liabilities are also claimed by creditors whom is obligated to repay.
Liabilities are found below assets in the balance sheet section of the financial statement. For publicly traded companies, the financial statement is filed quarterly and annually with the Securities and Exchange Commission.
Liabilities, assets, and shareholders’ equity are the main components of the balance sheet. And a company’s balance sheet is what its name implies: assets must equal liabilities and shareholders’ equity. Liabilities are measures that follow generally accepted accounting principles.
What Are the Types of Liabilities?
Most liabilities can be generally categorized as either current or not-current based on how soon payments are due.
Current
Liabilities that typically are expected to be settled within one year after the date of the published balance sheet for a period are classified as current. This includes short-term borrowings and accounts payable, which are bills or invoices for the purchase of goods or the payment of services from a vendor on credit. Another important current liability is deferred income, also known as deferred revenue or unearned revenue, which is when a company receives payment in advance of delivery of its goods or services.
Other current liabilities include wages payable, interest payable, and accruals expenses that haven’t been recorded on the company’s books, which can be for employee and other operating costs. Some companies provide a breakdown of their current liabilities, while others lump it all together.
Non-Current
All liabilities not categorized as current are classified as non-current, or long-term. Deferred income can sometimes be classified as non-current because delivery of goods or services may take longer than a year after payment has been made. Other types of non-current liabilities are long-term financial liabilities such as long-term debt, and deferred tax liabilities
Debt can be either current or non-current, depending on the length of maturity. Debt of a year or less can be quicker to convert into cash, while a company may hold longer onto debt with maturities exceeding one year.
What Are Contingent Liabilities?
Sometimes, a company’s potential liabilities are taken into account, and money is set aside to cover them (almost in the same way that banks have reserves against potential bad loans). Contingent liabilities can include money set aside to cover lawsuits or warranties, for example. The downside to contingent liabilities is that a large amount may negatively affect a company’s share price.
Contingent liabilities are usually mentioned in the notes of the financial statement, but aren’t recorded until they are followed through or are likely to occur. A contingent liability that is recognized is listed as an expense in the income statement and as a liability on the balance sheet.
Liabilities Example: Apple (NASDAQ: AAPL)
Below is Apple’s list of liabilities on its balance sheet, broken down into current and non-current liabilities. Companies, and Apple is no exception despite its large cash pile, take on debt as part of financing their operations. Term debt—both current and non-current—increased, and Apple notes in its financial statement how changes in interest rates can affect its interest payments.
Why Are Liabilities Important?
Liabilities help investors understand a company’s financial strength. More liabilities than assets could mean that a company has many debt obligations to meet and that could mean focusing more on repayment than on investing or expanding its operations.
Frequently Asked Questions (FAQ)
The following are answers to some of the most common questions investors ask about liabilities.
Can Liabilities Be Negative?
Negative liabilities are highly unusual. A negative liability would imply that a company has paid more than it was obligated to repay.
What’s the Difference Between Liabilities and Debt?
Liabilities represent all forms of financial obligations, while debt is a liability that specifically represents borrowing in the form of a loan that must be repaid.
