Liabilities

Liabilities are the debts or financial borrowings either directly or indirectly taken by the company in order to expand business and finance operations. They help to smoothen the flow of the business. Even liabilities like assets are divided into current and long term liability.

Debts which are payable within one year are classified as current liabilities, however liabilities having a longer period for repayment i.e. more than one year, are known as long term liability or non-current labilities. In certain cases a part of the long term liability which is due in the current year will be considered as current liability and the rest of the part will continue to be long term liability.

Analysts are interested in the current liabilities to understand the liquidity of the company and whether the company will be able to pay off its immediate dues. These current liabilities include accounts payable, sales tax payable, short term loans, current maturities of long term debt, etc.

Long term debt is usually the loans, debentures and other long term borrowing raised by the company. It also includes preference share capital, under new accounting norms IndAS. In some cases long term liabilities can also include rent, deferred taxes and pension obligations.

The most important thing is that expenses should not be mixed up or confused with liabilities as expenses are shown on the Profit & Loss Statement whereas the Liabilities are shown on the Balance Sheet.

For example: Material Consumed for production during the entire year is an expense and shown against revenue in the P&L Statement whereas Amount payable to creditors is a Liability and gets reflected on the Balance Sheet.