What Are Liabilities?

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What Are Liabilities?

Liabilities are obligations a company owes to outside parties. They represent rights of others to money or services of the company. Examples include bank loans, debts to suppliers, and debts to its employees. On the balance sheet, liabilities are usually broken down into current liabilities and long-term liabilities.

Things To Know

  • On the balance sheet, liabilities are usually broken down into current liabilities and long-term liabilities.
  • Both bond and stock investors scrutinize liabilities.

Current liabilities

Current liabilities are those obligations that are usually paid within the year, such as accounts payable, interest on long-term debts, taxes payable, and dividends payable. Because current liabilities are usually paid with current assets, as an investor it is important that you examine the degree to which current assets exceed current liabilities.

Accounts payable

The most pervasive item in the current liability section of the balance sheet is accounts payable. Accounts payable are debts owed to suppliers for the purchase of goods and services on an open account. Almost all firms buy some or all of their goods on account. Therefore, you will often see accounts payable on most balance sheets.

Long-term debt

Long-term debt is a liability of a period greater than one year. It usually refers to loans a company takes out. These debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.

Why investors care about liabilities

Both bond and stock investors scrutinize liabilities. A company that has too many financial obligations may be in danger of going bankrupt. In this case, both bond and stock investors usually lose. Bond investors also must examine the type of debt that the company has issued. If a bankruptcy does occur, there is a hierarchy of debtors. An investor will want to ensure that he/she is high on the list to be paid before the money runs out.