What Are Total Liabilities?

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What Are Total Liabilities?

Let me explain total liabilities directly: these are all the financial obligations you or your company owe to others that haven't been paid yet. Everything you own falls under assets, but what you owe—whether for future payments or as claims against those assets—counts as liabilities. Subtract total liabilities from total assets, and you get equity. If liabilities exceed assets, equity turns negative, which isn't ideal but happens.

Key Takeaways

Total liabilities break down into short-term, long-term, and other categories.
On a balance sheet, total liabilities plus equity must equal total assets.
Liabilities include everything from lease payments and utility bills to bonds and credit card debt.
They classify as short-term if due in under a year, or long-term if beyond that.

Understanding Total Liabilities

Think of liabilities as obligations between parties that aren't settled yet—you haven't paid or completed them. You settle them over time by transferring money, goods, or services. They cover a range of items, from monthly leases and utility bills to bonds issued to investors and corporate credit card debt. If you've received money for a service or product not yet delivered, that's unearned revenue, and it counts as a liability because you still owe the customer. Even future payouts like pending lawsuits or product warranties go here as contingent liabilities, but only if they're likely and you can estimate the amount reasonably.

Types of Liabilities

On a balance sheet, you typically split total liabilities into three categories: short-term, long-term, and other. Calculate total liabilities by adding up all short-term and long-term ones, plus any off-balance sheet liabilities. Some balance sheets show percentages alongside numbers, called common-size balance sheets.

Short-term Liabilities

Short-term or current liabilities are those due within a year or less. These include payroll, rent, and accounts payable—money you owe to suppliers or customers. Investors watch these closely to ensure you have enough cash to cover them.

Long-term Liabilities

Long-term or noncurrent liabilities are debts and obligations maturing beyond one year, like debentures, loans, deferred taxes, and pensions. You don't need as much immediate liquidity for these since they're spread out. Expect to pay them with future earnings or new financing. A year usually gives enough time to convert inventory to cash if needed.

Other Liabilities

When you see 'other' in financial statements, it means items that are unusual, don't fit main categories, and are minor. For liabilities, this could be intercompany borrowings or sales taxes. Check the footnotes in financial statements to see exactly what a company's other liabilities include.

Advantages of Total Liabilities

By themselves, total liabilities don't tell you much, maybe just how your obligations compare to a competitor in the same industry. But combine them with other figures, and they become useful for analysis. Take the debt-to-equity ratio: it shows if shareholder equity can cover all debts during a downturn, evaluating financial leverage. Another is debt-to-assets, which compares liabilities to assets to reveal financing sources.

Special Considerations

A high amount of total liabilities isn't automatically a sign of poor financial health. Depending on interest rates, it might be smart for your business to take on debt to acquire assets. That said, total liabilities directly affect creditworthiness. Low liabilities generally mean better interest rates on new debt, as they reduce default risk for lenders.

What Are Total Liabilities?

Highlights