Introduction to Balance Sheet Liabilities
Let’s start going through the right side of the balance sheet which starts with a company’s liabilities. Balance sheet liabilities are simply things of value that a company owes to someone else. Like in the assets section of the balance sheet, we split up the liabilities section into parts relating to the time frame of the liability. The first part is called current liabilities which we’ll define and give some examples below. In the previous posts, we’ve gone through what an asset is and the different categories of assets like current assets, fixed assets and other assets if you need a refresher on these topics.
Current Liabilities Definition and Examples
Current liabilities are those that a company expects that it will repay within the year. Current liabilities are typically grouped by who they owe the debt to. We’ll walk through the most common balance sheet liabilities that you’ll usually find:
Accounts Payable: The accounts payable liability is money that a company owes a supplier for something that they bought on credit. Think of it as the company’s credit card bill. They’ve placed an order with a supplier and received their order but have not paid cash back to the supplier. Instead, they record this amount in the accounts payable section (again, think of a credit card balance) which usually has to be repaid within 30-60 days from the time they receive the materials.
Accrued Expenses: This liability is similar to accounts payable except that it is usually used for regular or reoccurring expenses for services or supplies. An example of this would be salaries that are owed to employees but have not been paid yet (like if they are halfway through their pay period). Other examples could be bills that have not been paid for services like accounting, lawyers, facilities maintenance, and a number of others.
Current Portion of Long Term Debt: We’ll use an example for this liability since it can be a little tricky. The current portion of long term debt is the amount of long term debt that you will have to repay over the next year. Say that you have a home mortgage that has 25 years left to repay the full amount and each monthly payment is $1000. In this case, we’d classify $12,000 ($1000 per month for 12 months = $1000 x 12 = $12,000) of the mortgage as the current portion of long term debt since that amount will have to be repaid within the next year. The rest of the balance on the mortgage would be put in the long term debt category (which we’ll cover in the next post).
Income Taxes Payable: The final current liability section is income taxes payable which is the amount of taxes that the company will owe to the government but has not paid yet. For each sale that a company makes, they have to pay a portion of that amount to the government as taxes. Companies usually have to send in a check for taxes about every three months so the amount that they owe in between those periods is put in this section.
The Long Term Side of Debt
The other form of debt that a company has is debt which they don’t expect to repay within the next 12 months. This is commonly long-term financing on land, buildings, equipment or anything else with a longer payment plan. As we talked about above, we put the portion of the long-term debt that we’re going to pay off this year in the Current Portion of Long Term Debt. Because of that, our actual amount of Long-Term Debt this is recorded as balance sheet liabilities is the total long-term debt minus the Current Portion of Long-Term Debt.
And with that, we’ve covered all of the major balance sheet liabilities that a company usually has. Great work! In the next post, we’ll cover the equity portion of the liabilities section which will finish up the right side of the balance sheet.
Key Takeaway: Current liabilities are those that have to be repaid within the next year. Some common categorizations of current liabilities are Accounts Payable, Accrued Expenses, Current Portion of Long Term Debt and Income Taxes Payable. The other category of balance sheet liabilities are Long-Term Debt, which is the total amount of long-term financing minus the Current Portion of Long Term Debt.
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