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Understanding Your Balance Sheet - 2. Make Up - Liabilities

This is the 2 in a series of posts that have the aim of helping you, the business owner, to better understand your Balance Sheet so that you can use it to work for your business.

Make Up

We are currently looking at the different categories of accounts that make up the Balance Sheet. The last post explained the Assets category of accounts and looked at the different types of Assets that can be found on a Balance Sheet. In this post we will be looking at the next category of accounts that can be found on a Balance Sheet – Liabilities.

Liabilities

Liabilities are accounts that effectively reduce the value of a business. When a Balance Sheet is being looked at to determine the value of a business the Liabilities are deducted from the Assets in order to determine the value. Liability accounts represent monies that are owed by the business both short and long term. There are two categories of Liabilities represented on a Balance Sheet:

  • Current Liabilities
  • Longer Term Liabilities > 1 Year

We will look at each of these categories in turn.

Current Liabilities

Current liability accounts, as with Current Asset accounts, can change value on a daily basis. They represent money that is owed by the company and will obviously change in value as new costs come in or as monies are paid. There are three principal types of Liabilities:

  • Suppliers/Vendors – These are invoices received from suppliers/vendors that have not yet been paid.
  • Other Debtors – These can cover several types of debts e.g. short term loans, tax, GST, salaries etc.
  • Accruals – These are costs that have been incurred but which have not yet been invoiced. Larger companies that report on a monthly basis will generally accrue any costs not yet invoiced each month, often with the accrual reversing the next month. Smaller businesses will generally only accrue costs on an annual basis.

Longer Term Liabilities > 1 Year

The most common types of longer term liabilities are bank loans or mortgages since these can run over several years.

As with Longer Term Assets, there will often be two different accounts to represent a loan: one for the loan repayments that will be made over the next year; and one for the loan repayments that will be made in more than one year’s time.

Next Week - Equity

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