Now that you know what Liability means and what it takes for a property to become a liability, let us delve more into this subject.
TYPES OF LIABILITY
💰1. Long-term Liabilities
Long-term liabilities are those obligations of the business which are expected to continue for more than one year. They are also called non-current Liabilities
These include loans payable and mortgages payable.
Others are long-term bank loans like term loans, debentures, deferred tax liabilities, mortgage liabilities (payable after 1 year), lease payments examples of long-term liabilities.
Interest payable is also treated as the long-term liability if interest is payable on maturity.
💰2. Short-term Liabilities
Also called Current Liabilities, short-term liabilities are those obligations of the business which are expected to be paid off within a year.
These include: Sales taxes payable, creditors, salaries and wages payable, gratuity or bonus payable, interest payable, bills payable, sundry creditors, bank overdraft or cash credit, unclaimed dividends, pre-received incomes, sales tax payable, income tax payable, provisions, other taxes payable, accrued expenses, instalments due within 1 year for term loans.
In business finance, Current liabilities are closely watched by management to make sure that the company possesses enough liquidity from current assets to ensure that the debts or obligations can be paid off.
💰3. Contingent Liability
Contingency refers to something that may or may not happen. Therefore, Contingent liabilities are payable on the occurrence of some event or contingency.
Examples include: Default in supply, breach of contract, damage to the environment or to the prestige of some person or entity, an outcome of accidents and other law-suits, product warranty etc.
THE RELATIONSHIP BETWEEN ASSETS AND LIABILITIES
From our previous lessons, you’ve learnt that Assets are the properties – tangible or intangible – that the company owns.
Now, if you subtract total Liability from Assets, what you have is known as the Owner’s Equity.
The equation looks more like this:
Assets – Liability = Owners Equity
DIFFERENCE BETWEEN EXPENSE AND LIABILITY.
You should not confuse Expenses with Liability.
An expense is listed in the company’s income statement and it is the cost of operations that the company incurs in order to generate revenue.
In personal finance, expenses could be the amount you pay in order to purchase an item or settle a liability like rent.
Liabilities, on the other hand, are the obligations and debts which a company or an individual owes and have to be settled either in the short term or long term.
A liability is usually money owed by a business for the purchase of an asset.
You can recall I told you yesterday that some debts could be good right?
Actually, the Rich leverage on debt to create massive wealth.
Do you want to know how they do this?
Today’s lesson is already loaded so I am going to shift this explanation to the next and final episode of this series on Asset and Liability
CHECK OUT: How Debt Can Be Used To Create Wealth.