Liabilities

What is the Definition of Liabilities?

Liabilities are the obligations belonging to a particular company that must be settled over time, because the benefits were transferred and received from third-parties, such as suppliers, vendors, and lenders.

The balance sheet is one of the core financial statements and comprises three sections:

• Assets Section → The resources with economic value that can be sold for money upon liquidation and/or are anticipated to bring positive monetary benefits in the future.
• Liabilities Section → The external sources of capital used to fund asset purchases, like accounts payable, loans, deferred revenue.
• Shareholders’ Equity Section → The internal sources of capital used to fund its assets such as capital contributions by the founders and equity financing raised from outside investors.

The values listed on the balance sheet are the outstanding amounts of each account at a specific point in time — i.e. a “snapshot” of a company’s financial health, reported on a quarterly or annual basis.

Liabilities Formula

The fundamental accounting equation is shown below.

If we rearrange the formula around, we can calculate the value of liabilities from the following:

The remaining amount is the funding left after deducting equity from the total resources (assets).

What is an Example of a Liability?

The relationship between the three components is expressed by the fundamental accounting equation, which states that the assets of a company must have been financed somehow — i.e. the asset purchases were funded with either debt or equity.

Unlike the assets section, which consists of items considered cash outflows (“uses”), the liabilities section comprises items considered cash inflows (“sources”).

The liabilities undertaken by the company should theoretically be offset by the value creation from the utilization of the purchased assets.

Along with the shareholders’ equity section, the liabilities section is one of the two main “funding” sources of companies.

For instance, debt financing — i.e. the borrowing of capital from a lender in exchange for interest expense payments and the return of principal on the date of maturity — is a liability, since debt represents future payments that will reduce a company’s cash.

However, in exchange for incurring the debt capital, the company obtains sufficient cash to purchase current assets like inventory, as well as make long-term investments in property, plant & equipment, or “PP&E” (i.e. capital expenditures).

What are the Different Types of Liabilities on the Balance Sheet?

1. Current Liabilities

On the balance sheet, the liabilities section can be split into two components:

1. Current Liabilities — Coming due within one year (e.g. accounts payable (A/P), accrued expenses, and short-term debt like a revolving credit facility, or “revolver”).
2. Non-Current Liabilities — Coming due beyond one year (e.g. long-term debt, deferred revenue, and deferred income taxes).

The ordering system is based on how close the payment date is, so a liability with a near-term maturity date will be listed higher up in the section (and vice versa).

Listed in the table below are examples of current liabilities on the balance sheet.

2. Non-Current Liabilities

In contrast, the table below lists examples of non-current liabilities on the balance sheet.