What are Liabilities in Accounting?

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When it comes to business then, assessment of business accounts are important and necessary as well. Just to assess the business account, firms need to ensure that their organizations have the best accountant. An accountant is a person who provides Bookkeeping and Accounting Service. Here, we will be discussing liabilities in accounting. We will be also adding complete information about the liability to make you understand.

What are Liabilities in Accounting?

In accounting, when you or your business owes things that have monetary value to another business or individual referred to as Liability.

An asset is like money that others owe you or your business that includes receivable money, bonds, and many others. And, liability is just the opposite of the asset, in which you need to pay or repay, no one else has to pay or repay you eventually.

Understand the Role of Liabilities in Your Business!

If you have got a small business firm then, the evaluation of liabilities becomes extremely important as the desire is to rise. Upon accounting, you can know who can claim against your assets. This doesn’t only include other people, businesses, it even adds up to government claims.

And, to understand the net worth or book worth of a company, it is important to assess all assets and offset them against the assets (liabilities). Apart from equity evaluation, in the context of businesses ongoing operations, liabilities play a significant role. Business firms often take loans to expand their business, pay overheads.

Moreover, liabilities also involve those forms of monetary value that need to be paid on a regular basis. It includes carrying cost, interest payments (EMI), and more. All these liabilities are very important while bookkeeping and accounting the business account to evaluate net profit.

Understand Types of Liabilities

It is very important to assess all different individual items that represent liabilities. It includes outstanding mortgages, owed to employees, unpaid taxes, vendor bills, and many others.

In general, it falls into two basic categories in terms of repayment which is Short-term and Long-term liabilities.

Short-Term/ Current Liabilities

When you need to pay all the debts within a year, it is generally referred to as Short-Term/Current Liabilities. These liabilities include loans, wages, invoices, and tax bills.

Long-Term Liabilities

Long-Term liabilities are those liabilities that you shouldn’t need to pay before a year or 12 months. Such as loans, pension liabilities, lines of credit, and others like employee compensation are long-term liabilities.

How to Calculate the Liabilities?

The simple formula to calculate the liabilities is:

Total Equity = Total Assets – Total Liability

An accountant while their bookkeeping and accounting process come across with many financial terms and functions. They need not just assess but evaluate business profit and loss from the business asset, liabilities, and equity.

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