Liabilities are one of the most important financial components to support a company. What does liability mean? What are some examples? Check out the discussion in the following article.
Has Grameds ever felt confused because suddenly the company’s debt was greater than its income without knowing how this happened? If yes, learning about liabilities is an oas solution so that Grameds doesn’t experience it again.
Even though they have physical form and value, liabilities cannot be classified as assets. Unfortunately, until now there are still many entrepreneurs who fail to understand this. So what is meant by a liability? What are the types? The following is the explanation for Grameds .
What is a Liability?
In running its business, companies incur various types of costs with the aim of running operations. It is used in large quantities, so generally this fee is collected only in certain periods.
Apart from costs, many companies also have bills from external capital loans, or what is simply referred to as debt.
These two types of bills are included in the process of reporting the profit/loss balance sheet and are generally put together, and given the name “liabilities”.
So if defined, a liability is an obligation that is borne by the company, whether from internal or external sources, and must be paid immediately before the payment is due.
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Difference between Assets and Liabilities
Liabilities can have the same form and value as assets, either as capital or goods. This is what often causes entrepreneurs to misunderstand and assume that liabilities are the same as assets. In fact, assets and liabilities are two different things.
Assets are economic resources that are used to run the business and ensure the increase in wealth value for the company. Assets have two types, namely:
- Current assets (easily liquidated), for example land certificates, machines, buildings, brands , and so on.
- Non-current assets (difficult to liquidate), for example securities, receivables, cash, merchandise, and so on.
Meanwhile, liabilities are various economic resources used to run business that must be paid by the company to external parties within a certain time.
Liabilities cannot be abandoned, because they will definitely cause problems. Meanwhile, assets are the property of the company (or investors) so they can be managed as they wish on the basis of the company’s progress.
Apart from what has been explained in the previous point, other differences between assets and liabilities include:
Assets are financial resources that have economic benefits for the future. Meanwhile, liabilities are things that must be paid off in the near future.
The value of assets experiences a decrease or depreciation every year, while the value of liabilities will not decrease and can increase due to the application of the interest rate system.
When writing a financial balance, assets are written on the right, while liabilities are written on the left.
Liability Characteristics
After understanding the meaning of liabilities, this time we will learn about the characteristics of liabilities, namely:
- Has a payment due date.
- As a transaction or event that has occurred so that it obligates the entity.
- Must be resolved by paying it off.
- Requires assets and other entities to settle liabilities.
Function of Assets and Liabilities in Financial Reports
In a company’s accounting period, the smooth running of assets and liabilities is the main component as a support to show the stability and long-term prospects of the company. In a company’s financial report, liabilities or debt are one of a company’s strategies for consistently developing its business.
In fact, calculating the difference between liabilities and assets is a way to obtain equity or nominal capital obtained by the company. In short, assets, liabilities and equity are determinants for calculating dividends by investors or shareholders. Therefore, liabilities are one of the most important components that a company must have in an accounting balance sheet.
Types of Liabilities
Current liabilities are debts that the company must settle within one year or one accounting period. Companies’ decisions to take on debt are generally based on strategic and mature calculations. This debt will be used as business capital which will provide greater profits for the company’s future.
The components included in the liability group are short-term debt ( current liabilities ) and long-term debt ( long term liabilities ). More details regarding the liability components are as follows.
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1. Short Term Debt (Current Liabilities)
Short-term debt or liabilities are debts that a company must immediately pay or repay, or in other words, are company obligations that have a payment limit of less than a year, for example per month, per quarter or per semester. The slowest time to pay off current liabilities is one year of the accounting accounting period.
Another term used to refer to this liability is current debt, because the company has to pay it several times within one year.
The components included in current liabilities are as follows.
1. Trade Debt (Account Payable)
Trade payables in liabilities are debt decisions for purchasing goods such as raw materials to facilitate the company’s operational activities. Generally, this debt must be paid to the supplier or partner company.
2. Notes Payable
Short-term debt on notes in liabilities is a type of debt paid to the lender. This debt has a maturity or grace period of 30, 60 and 90 days according to the agreement previously made.
3. Expenses that need to be paid (Accrued Interest Payable)
Expenses that need to be paid in liabilities are types of liabilities that have the status of still not being paid in a certain accounting period. The components in accrued interest payable are rental costs, wages or salary expenses, and so on.
4. Deferred Income (Unearned Revenue)
This liability represents income from the company for its services to third parties. This debt payment has been received, but the income has not yet become the full property of the company so it is still said to be a debt.
5. Deferred Income (Deferred Liability or Deferred Revenue)
Deferred Revenue in liabilities is income received in advance for goods or services that have not yet been performed or delivered. For example, if goods or services have been delivered to consumers, then this component can only be referred to as revenue and included in the profit and loss statement.
6. Salaries Payable
This liability is a company obligation paid to all employees, but the total nominal amount that must be paid cannot fulfill this obligation. Therefore, this component is included in the company’s debt to its employees.
7. Dividends Payable
Dividend liabilities are a portion of the company’s profits that have been determined to be distributed to shareholders in the form of dividends. Because this nominal amount has not been paid, it will be included in the debt section of the accounting balance sheet.
8. Tax Payable
Tax debt in liabilities is an obligation that the company must pay off based on the tax calculations from all of the company’s assets in the form of buildings that are already in use.
2. Long Term Debt (Long Term Liabilities)
All debts whose repayment obligations are paid over a relatively long period of time or at least more than one year are long term liabilities . Long-term liabilities are obligations that must be paid by the company over a relatively long period of time, namely within one cycle of the company’s financial statements.
This liability can also be called non-current debt, because the company cannot pay this obligation in less than one year.
The components included in this type of liability are as follows.
1. Bank Debt (Bank Loan)
Bank debt in liabilities is loan funds from banks obtained by the company and used as company capital, such as for company mergers or business expansion activities.
2. Mortgages Payable
This liability is a company loan debt with collateral in the form of fixed assets or fixed assets owned by the company.
3. Bonds Payable
Bonds are medium to long term debt securities that can be transferred. This letter is evidence that states that the investor or bond holder lent a certain amount of money to a business entity or company that issued it.
If a company issues bonds, the company must pay the debt and interest on the amount of borrowed funds issued by the holder of this letter.
4. Noveltation Credit (Long Term Loan)
Novelty credit in liabilities is a company obligation obtained from a bank or other financial institution in the form of a long-term loan.
5. Durable Debt (Subordinated Loan)
Durable debt is an obligation by the shareholders of the parent company which does not use an interest system.
6. Payable Lease
Payable lease in liabilities is a debt originating from a foreign company for the purchase of fixed assets where all payments are paid in installments over a relatively long period of time.
7. Shareholder Debt (Holding Company Loan)
If a company has affiliated companies, shareholder debt becomes an obligation that must be paid. This debt must be given from the parent company to affiliated companies or new subsidiaries as operational capital for the company’s business. Generally, this liability can be paid in installments over a relatively long period of time.
Debt to Equity Ratio
The first liability component that must be analyzed is the debt to equity ratio (income/added company value). Before starting, ask Grameds yourself about the following: is the equity the company has obtained enough to pay all the debt it has?
If the amount of debt reaches 50% or more, then the company’s finances are in an unhealthy condition. So that in the following year the company must try to reduce liabilities and increase equity.
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Debt to Asset Ratio
The next liability analysis that Grameds needs to do is the debt to asset ratio. This component becomes more important, because it concerns the company’s operational permit.
If after the analysis it is found that the debt amount reaches 50% or more, then the Grameds company’s assets are at risk of being mortgaged (if it fails to pay its liabilities).
The ideal amount for a debt ratio is 40%, or less. The lower the debt to asset ratio, the safer the company’s operations will be.