What are liabilities?

Liabilities are all of a company's financial obligations owed to others. This is opposed to assets, another crucial component of balance sheets, which are any item of property owned by the company that has value.

Liabilities are ordered on the balance sheet from top to bottom regarding how soon the debt is due.

Current liabilities are bills due within the following year. This could include wages owed to workers, money owed to suppliers, and taxes owed to the government.

Long-term liabilities are debts not expected to be paid off in the next twelve months. These could include interest and payments on long-term debt, worker pension programs, and taxes not due within a year.

Going line by line through the liabilities section

Let’s now review the liability side of the balance sheet.

Accounts payable occur when a company receives goods or services for which it did not pay upfront but used credit. When you’re out to dinner with a friend who foots the bill until you pay them back, this is roughly the equivalent of accounts payable.

Accrued expenses are liabilities that the company has taken on through its normal operations but has not yet paid. Examples include employees’ wages between paydays, which are accrued before workers are paid for their labor. Other examples include a business’s utility bill or taxes.

Short-term debt is what a company owes on loan interest or principal on bonds it has issued that is due within the next year. In our personal lives, this is similar to the debt expenses we owe on our credit cards.

Long-term liabilities are debt that is not due to be paid beyond the next twelve months.

Long-term debt is any interest or principal on bonds that is not due within the next twelve months. Think of a homeowner’s 30-year mortgage. Any mortgage payments scheduled beyond the next twelve months would fall into this category.

Other long-term liabilities can include things such as back taxes for which a company has agreed to a multiyear payment plan or pension liabilities.

Convertible debt is another important term investors need to know if they want to analyze a company’s balance sheet. It is debt that, in lieu of being paid off, can be converted into stock ownership at a certain date at an agreed-upon price.

Investors might also often see the term note, which is a legal document representing a loan's terms, including the interest rate and payment schedule.

Finally, it is important to note that investors can find positive elements on the company’s liability side of the balance sheet.

For instance, deferred revenue is cash already collected for a good or service that the business has yet to deliver. Companies cannot count this prepayment as revenue until that product or service is delivered to the customer.

Key Takeaway

Liabilities represent the financial obligations a company owes to others, ranging from short-term debts like accounts payable to long-term commitments such as bonds and pensions.

These obligations are crucial for understanding a company's financial health, as they illustrate how it manages its resources and funding.

By examining the liability section of the balance sheet, investors can assess both the company's current payment responsibilities and its long-term financial strategies.