Understanding the Balance Sheet: Liabilities

Liabilities and equity make up the right-hand side (or the lower half) of a balance sheet.  The liabilities entries show claims on the company’s assets held by people outside the business.  The equity entries show what’s left for the company’s owners after all the other claims have been accounted for.

What’s on the list of a typical small company’s liabilities?  Liabilities are categorized by how current they are.  Those that must be paid in the next twelve months are at the top, so we’ll start there.

The first entry is accounts payable.  That doesn’t need much explanation: it’s what a company owes its vendors and suppliers for goods and services purchased.

The next entry is taxes payable.  Again, no explanation is necessary.  What a company owes the government for income tax is just another kind of payable.  And if the business has other short-term obligations, they’ll be listed under other liabilities.  This is another catch-all category: it might include vacation that employees have earned but haven’t yet taken and deposits that the company has received from customers for work to be performed in the future all the above liabilities are summed up under the heading current liabilities.

Then comes long-term debt.  If your company has borrowed money, the amount it owes will show up here.

Most balance sheets then add up all the liabilities to show the company’s total liabilities.   Then come the entries that show equity.  Typically, the equity entries are labeled common stock and/or paid-in capital, which includes all the money that shareholders have invested in the company, and retained earnings, which is all the accumulated profits the company has earned that it has never paid out to shareholders.

This is the 3rd blog of 5 blog series that will be posted this week to help you understand one aspect of running a business that is crucial to be able to make informed business decisions for your business. Check back tomorrow for more content.


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