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Liabilities
We have learned that assets are things that a company owns but liabilities are what a company owes to other parties. Here in this section, we will discuss the concept of 'Liabilities.'
A liability is an obligation or debt of the entity that arises during the course of business operations, the settlement of which is expected to result in an outflow of economic resources of the entity. Like assets, there are two types of liabilities:
- Current Liabilities
- Non-current liabilities
Current Liabilities:
Current liabilities are obligations the firm must pay within the current operating cycle (usually a year) such as payments owing to suppliers, short term debt, accounts payable, etc.
Four important current liabilities items found on the balance sheet are:
- Accounts Payable:
Accounts payable are amounts owed to suppliers for goods or services purchased or availed on credit. Accounts payable are types of debts that must be paid off to the suppliers within a given period of time in order to avoid default and run the business smoothly.
- Notes Payable:
Notes payable are obligations in the form of promissory notes owed to creditors. They can also be included in non-current liabilities, if their maturities are greater than one year.
- Current portion of Long-term debt:
It is the principal portion of long term debt that is due within one operating cycle of the firm or a year, whichever is greater.
- Taxes Payable:
Taxes payable are current taxes that have been recognized in the income statement but are not yet paid.
Current liabilities:
(a) Financial liabilities
- Borrowings
- Trade payable
- Other financial liabilities
(b) Other current liabilities
(c) Provisions
(d) Current Tax liabilities (Net)
Non-Current Liabilities:
It represents those liabilities that are not due in the next operating cycle. Typically, non-current liabilities represent bank and bondholder's debt.
Deferred Tax liabilities, Long-term leases & Pension liabilities are a few other examples of non-current liabilities.
Non-current liabilities:
(a) Financial liabilities
- Borrowings
- Other financial liabilities
(b) Provisions
(c) Deferred tax liabilities (Net)
(d) Other non-current liabilities
