In balance sheet,
liabilities define as an obligation of an entity arising from past transactions
or events, represent as creditor’s claim on business assets, the settlement of
which may result in the transfer or use of assets, provision of services, or
other arrangement to generate any future economic benefits. Liabilities refer
to money lend from person, bank or suppliers to be used for business operation
that is payable in a certain period or based on agreement.
Liabilities refer to one of
the source of funds for a company and it will use for purchasing power to expand
the business operation. These debts can be paid with interest in an agreed
obligation contract.
Liabilities
in Balance Sheet can be classified into three categories:
- Current Liabilities
- Long Term Liabilities
- Contingent Liabilities
Current
Liabilities represent the amount owed to creditors’ payable
within 12 months. These liabilities are allocated for normal operating expenses
due within a year. Managing current liabilities is important with business cash
flow cycle to ensure the liquidity of the company operation. The company has to
pay these liabilities in a normal accounting cycle; it reflects the effective
management of working capital.
The
following are the classification of current assets:
Accounts
payable
These accounts represent the
purchase of supplies or any assets use for business operation on credit or on
account and intent to pay within the normal operating cycle or within a year.
Accounts payable owed to suppliers for products and services that has been
delivered but not paid and it can be paid in a week, month or in a year.
Notes
Payable
This account is the current
portion of long term payable. The current liabilities occurred when purchase in
a supplier payable in specified time with promissory note that usually includes
interest.
Accrued
Expenses
Accrued expenses represent
operating expenses incurred but not paid. These expenses refers to opposite way
of prepaid expenses wherein paid already but not recorded as an expense due to
actual recognition of expense during the monthly period. Accrued expenses represent amount of services
render or good received but not yet paid.
Salaries
Payable
This account represents
amount owed to employees. The type of current liabilities wherein the company
has to pay the due salary for specified period but not paid on the time of
occurrence. For instance, the salary due for the month ended April 30 and the
company paid it May 2, the accounting entry as follows:
April 30
Salary Expense
Salaries Payable
May 2
Salaries Payable
Cash in Bank
Dividends
Payable
This payable is the payments
due to shareholders when they declare the dividend called dividends payable.
Income
Tax Payable
These liabilities refer to the
amount of tax due to the government authority based on the accounting profit
earned.
Unearned
Revenue
Unearned revenue or unearned
income pertains to the money receive from customers that it hasn’t yet earned
by delivering the goods or services that has to be done for customers however
that it anticipates earning within 12 months on the date of the balance sheet.
Non-current
Liabilities or long-term liabilities are those liabilities
that a company has to pay back the loan / debt after one accounting period or
more than one year. Long-term liabilities are normally has interest bearing.
The company has to pay those loan based on the installments agreed upon with
each creditor.
The long-term liabilities
are generally an important part of the capital structure of a company. It
provides fund for the purchase of fixed assets used to generate income over
many years and provide significant benefits to a company that should be settle
in due time to ensure the stability of the business.
The long-term liabilities
reflect the solvency of the business operation. It is necessary that the
company has to pay its short-term and long-term debt obligations of the company
otherwise the assets of the business will sacrifice and the business operation
will finally closed.
Bonds
Payable
These accounts are bonds
issued by a corporation to support the finances for expensive assets. Bonds are
part of the corporation's obligation and will usually be reported as a
long-term liability.
Most bonds require the
issuing corporation to pay interest semi-annually and to pay the principal
amount on the date that the bonds mature. Based on the accrual method of
accounting, the corporation must report a bond's accrued interest expense and
liability as of the date of its financial statements.
Issuing bonds instead of
common stock delivers two benefits in a corporation. First, the strong ownership
interest of its common stockholders and second, the bond interest expense is
deductible on the corporation's income tax return. The tax deduction of bond
interest expense will result in a tax savings for a profitable corporation and
this is effective practice of reducing the corporation's cost of the interest
payments to bondholders.
Contra
liabilities are liability accounts with debit balances. Examples of contra
liability accounts include:
- Discount on Notes Payable
- Discount on Bonds Payable
Long-term
Leases
These are the capital leases under the long-term liabilities refer
to rental arrangement that extend past 12 months of the date of the balance
sheet while in assets account the rental contract during the period of one
year, it is treated as prepaid rent before it becomes monthly expenses and to
be reflected in income statement.
Contingent
Liabilities are potential liabilities and it is normally derived
from mishandled or uncontrollable situation. These liabilities dependent upon
some future event occurring or not occurring, they may or may not become actual
liabilities. There are three situations in contingent liabilities such as
warranty of a company’s products, the guarantee of another party’s loan, and
lawsuits filed against the company.
For instance, the company
gave product warranty unfortunately; the warranty had confusion with a certain
clause. If the customer complaints with the defective product but the company don’t
want to accept and they blame the customer for the problem. The customers went
to the court and asked for refund. When the court decides to reimburse the
amount of the product to the customer it is uncertain on the part of the
company and they have to pay it back to the customer.
Another example, when the
company terminated one of the employee without justified reason and the
employee file lawsuits against the company it is clear that the company acted improperly,
the company will record this transaction as a loss on an income statement that
can be estimated and a balance sheet liability.
In accounting rules, the
contingent loss is probable and the amount of the loss can be estimated, the
company should record the liability on its balance sheet and a loss on its
income statement. If the contingent loss is isolated, no liability or loss is
recorded then it should be disclosed in the notes to the financial statements.
Notes to the financial
statements can expose all important information that should not be ignored when
reading a company's balance sheet.
