Components of Liabilities – Balance Sheet

WHAT IS A BALANCE SHEET ?

Balance Sheet is the financial statement of a company which includes assets, liabilities, equity capital, total debt, etc. at a point in time.  In short, it shows what a company owns and owes.  A balance sheet along with other financial statements helps to calculate the profitability, liquidity and efficiency of a business. Balance sheet has two main heads ,i.e Assets on one side & Liabilities on other side . Both the sides are always equal, therefore,

The balance sheet is based on the accounting equation :

Assets = Liabilities + Capital

COMPONENTS OF LIABILITIES

Liabilities are the debts or obligations of a company at a given point of time. It is the amount that a company owes to outside parties or its creditors. Similar to assets, liabilities are also classified into two categories , i.e , Non Current Liablities and Current Liabilities .

NON CURRENT LIABILITIES

Non current liability is a long term debt. In simple words, any financial obligation which a company has to pay after a period of more than a year are known as non current liabilities.  These liabilities form an important part of company’s long term financing and also help in determining the company’s long term solvency position . For example , mortgages , business loans , bonds payable etc.

CURRENT LIABILITIES

Current liabilities , also known as short term liabilities, are due within a period of one year. These are the financial obligations or debts which a company has to pay back in a year or so. Current liabilities play a very important role in several short term liquidity measures . These may include–

Accounts payable – This is money owed to suppliers.

Accrued expenses –Money which is due to a third party , but not yet payable , for example – wages payable

Short term loans –Loans which are due on demand or within a year.

Income tax payable – These are taxes owed to the government that have not yet been paid.

 

Thus, balance sheet is one of the most important financial statements for a business as it shows the true and exact financial position of the firm as on a particular date .

Accounting & Finance for Banking

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