Accounting Liabilities and Assets
Accounting liabilities refer to financial obligations a business has. These debts are often used to finance operations and assets. They must be accounted for as future cash outlays, since they must be repaid at some point. A business should not ignore any liability, whether it is big or small. While most business owners don’t pay attention to accounting liabilities, they are important to businesses because they represent actual business costs. However, these expenses may be unexpected or not fully paid off.
Debts are divided into three categories. Long-term liabilities are those that must be paid in a year or more. These include things like bonds payable and delayed tax settlements. They also include deferred payment toward equipment or machinery. Contingency liabilities are those that arise from unforeseen events in the future, and are based on conjecture. Companies may also have liabilities related to product warranties or product recalls. This list is extensive, and the differences between the two are vast.
In general, a business will have two main types of liabilities: debts and assets. The latter are a business’s debts, while the former refers to its debts to other people or entities. An organization’s assets, on the other hand, are the money it owns, such as equipment and property. However, it is important to understand how to properly calculate the value of assets, especially debts and assets, and what they mean to a business.
Contingent liabilities refer to potential liabilities or losses that a company may incur based on a future event. In the case of a business lawsuit, a liability may be monetary, even if the business isn’t actually liable. For example, a liability that will reduce when the money is earned can be a customer advance, or deferred revenue. When money is not postponed, the contingent liability becomes an asset that the company can account for.
Another type of accounting liability is a loan. A loan can be categorized as a short-term or long-term financial obligation. Loans and mortgages are long-term financial obligations. They can be classified as long-term or short-term depending on their maturity. When a business borrows money, it will have liabilities that are owed to other businesses or organizations. These liabilities can include a bank loan, a car or a mortgage.
Balance sheets are an essential part of a business’s financial statement, and they represent the current financial status of the business. Both internal and external users use the balance sheet. They consist of two columns: assets and liabilities. Both columns must balance. The balance sheet formula can only be maintained if all accounting transactions are made with the intention of maintaining the balance. For example, a company may post a debit of $10,000 to cash and a credit of that same amount to bonds payable.