What are the Liabilities in Your Business?
Posted On: 28/06/21 - 0

Liabilities in your business are amounts your business owes at any one time. These are often expressed as payables for accounting purposes. Unless you run a complete cash business, you probably have liabilities in your business. The value of your business is the difference between your assets and liabilities.  Many business assets are difficult to measure or touch, which makes them hard to put a value on them.  Some examples of these assets in your business could be goodwill, recipes, and employee morale.  Liabilities are often easier to quantify. Ultimately, understanding the different liabilities in your business will help you better manage, control, and take steps to reduce or eliminate them.

Different Types of Liabilities In Your Business

Liabilities are shown on your company’s  financial statement.  These are shown to you as the owner of the business at the end of an accounting period. The assets of the business are shown on the left, and the liabilities and your equity are displayed on the right. Liabilities are listed in a specific order. There are three main classifications of liabilities. The first being a short term liability.  These are payments that are due and payable within a year. Second is the long term liability. These payments are due after a year or more.  Then thirdly, there is the contingent liability.  These may or may not happen, it all depends on a particular event.  We will go into more detail about all three of these liabilities for you.

Firstly, What Are Short-term Liabilities?

Business owners like you watch short term liabilities very closely. This is to make sure that the business has enough liquidity, which means the ability to convert to cash quickly from existing assets. This ensures that you can pay off your outstanding debts or obligations when the balance is due.  

In addition, current liabilities in your business would include accounts payable, interest payable and income taxes payable. This category also includes bills payable, short-term loans, and your accrued expenses in your business.

Secondly, Long-term Liabilities

Your non-current liabilities are debts that are due in over a year. Businesses like yours take long-term debt to acquire immediate capital for the business. You would likely do this to fund the purchase of assets for your business. In addition to this, you may also consider this if you were thinking of investing in new projects or expanding your current business. Whatever it may be for, your long-term liabilities are a vital source for long-term financing in your business.

What is equally important to remember is that your business could face a crisis if you are unable to repay your long-term liabilities as they become due. These liabilities could include mortgage payable, deferred tax liabilities, and even a capital lease.

Lastly, Contingent Liabilities

These liabilities depend on the outcome of an upcoming event. In this case, contingent liabilities also refer to as possible liabilities in your business. For instance, if your business faces a lawsuit of $200,000, you would be faced with a liability if the trial proves to be successful. However, if the lawsuit is unsuccessful, the company will not face any liability. An accountant would only record a contingent liability if the liability is highly probable in your business. What’s more, is the amount can be reasonably estimated. An example of contingent liabilities are lawsuits or even something as simple as a product warranty.

Now you have a good idea of what the liabilities in your business are and the types that exist.  You now are more informed to see how your business is financially. That includes for both the short and long term life of your business cycles.

Finally, do you have other questions regarding the liabilities in your business? Why don’t you give us a call?  It would give us an opportunity to provide you with corporate solutions that make sense for your individual business.

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