Liabilities: Definition & Types



What is a Liabilities?

Liabilities are monetary obligations of an entity which are required to be paid off using an asset. These obligations arise due to any past event or transaction.

Example: 

Mr. Sayan has to pay Mr. Ayan as he has purchased car from him. So, the responsibility to pay Mr. Ayan is liability of Mr. Sayan.


Types of Liabilities

In 'T' format company balance sheet, liabilities are listed left hand side and assets are listed right hand side. Liabilities can be classified depending upon their nature & time period.


(a)Current Liabilities

Current liabilities is also called as short term liabilities. These obligations have to be settled within one year.

Example:

Creditors, short term loans, bills payable, interest payable, unclaimed dividend etc.

Important ratios that uses in current liabilities. These are,
(i) Current ratio 
(ii) Quick ratio
(iii) Super quick ratio etc.


(b)Non Current Liabilities

Non current assets is also called as long term liabilities. These obligations have to be settled in over a year's time. They are important to determine long term Solvency of the company. Non current liabilities are normally loans taken by the company for new projects or purchase new fixed assets etc. 

Example: Long term loans, mortgage lease, deferred tax, debentures etc. 

Important ratios that uses in non current liabilities. These are,
(i) Debt to equity ratio
(ii) Interest coverage ratio 
(iii) Capital gearing ratio etc.


(c)Contingent Liabilities

Contingent liabilities are our potential liabilities that is an obligation may occur in future depending upon an event, which may or may not result in cash outflows.

Example:

A company is facing a lawsuit for Rs 100,000. If final decision is in favor of the company, it will not face any liability, but if decision is against the company, this is a potential liability.



Is liabilities always bad for a company?

Debt financing is always harmful not at all. Debt can helps expand the operation of the company. Debt financing is cheap source of funds for many companies but whether company makes profit or not, so company has to pay interest at a fixed rate. As an investors should careful when analyze the company.

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