Liabilities are financial responsibilities that need to be repaid. In business terms, they are often referred to as payables or accounts payable. This is one of the items you will find on a balance sheet.
In small business accounting, common liabilities include payroll; the cost of any goods, raw materials, supplies; and taxes, including taxes on sales. Most small businesses also have interest and principal payments on loans or lines of credit. This is expected since asset purchases are part of doing business. However, a business should have enough assets to cover the debt. This is a ratio of debt to equity and debt to assets.
Liabilities are often confused with expenses. Liabilities are money owed usually like a loan to purchase office equipment. Expenses are ongoing payments that have no physical value. Utilities are an expense; the mortgage is a liability. Expenses are listed on your income statements but not on the balance sheet. So the liabilities are shown on the balance sheet if:
• Owed as a past transaction
• Owed as of the date the balance sheet is prepared
• Includes advances, or money paid in before it has been earned
Some of the titles would be:
• Accounts payable
• Short-term loans
• Accrued liabilities
• Deferred revenues
The balance sheet will list two classifications: current and long-term. Current liabilities are payable within one year of the balance sheet date and will use some assets to secure the payment. That would be like a short-term loan (credit card) or the portion of a long-term debt owed that year (interest). It will also include accounts payable, income taxes due, and others.
• Short-term loans are obligations where the principal amount must be repaid within one year or sooner, unlike a mortgage that can span decades.
• The current portion of long-term debt is the amount of the principal that is due within the next 12 months.
• Accounts payable is probably the most common liability. It is the compilation of all the money the business owes to vendors or suppliers for materials that were purchased on credit. In other words, you ordered a load of lumber for your carpentry business and the lumber yard sends you an invoice for the amount of the purchase and that amount is due within the time specified on the bill. Accounts payable are usually backed up with written invoices that have been received, approved for payment, and recorded in the bookkeeping system.
• Taxes are another common item on the balance sheet. This is the amount of the annual tax debt based on the type of business (i.e. corporation, sole proprietorship, partnership, etc.). It also includes any taxes based on sales.
All of this can be pretty confusing. A good source of information is your accountant. In fact, they will probably recommend software packages that will make the job easier. Couple that with cloud storage and you will be able to handle the bookkeeping much easier and always have the information close at hand.
Contact your Accountants today click on this link —> https://capexcpa.com/contact
- The Capex Team