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| Businessman trapped in excessive debt |
Meaning and Definition:
What
a business owes is a liability. It is
a debt or obligation of an organization contracted during the course of
business. In financial terms liabilities are a source funding assets. Liabilities have a credit balance in the
books of accounts. Therefore, all credit balances appearing in the balance
sheet are liabilities.
Those
liabilities that need to be paid over a long period of time are long-term
liabilities. Those repayable within a year are current liabilities.
Examples:
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Long-term Liabilities
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Short-term (Current) Liabilities
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Long Term Loans
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Short-tern borrowings
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Debentures
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Supplier Bills Payable
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Bonds
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Taxes Payable
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Preference Share Capital
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Salaries and wages payable
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Equity Share Capital
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Short term provisions
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Reserves and Surplus
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Installments of term loans maturing within a year
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Significance:
We
have already seen that liabilities are one of the sources of finance but
excessive debt or liabilities is very dangerous for the business as inability
to repay debts on time may cause insolvency or bankruptcy! Therefore many
parameters like the debt-equity
ratio, current ratio, quick ratio, and TOL/ TNW are used to closely monitor the
liability levels of the business.
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