Liabilities refer to financial obligations or debts that an entity incurs in the course of running its daily business. The debts are settled in the course of the business period by transferring the organization’s economic benefits to the creditors. They include loans, mortgage, and accrued expenses and deferred revenue (Scott, 2015). They are recorded on the right side of the balance sheet. The purpose of this essay is to examine different types of liabilities and their importance to a business.
Any business entity can incur either current or long-term liabilities. Current liabilities refer to the short-term financial obligations of an organization. They are usually payable over a period of one year or less. They include the accounts payable and payroll expenses. For example, the money paid to the vendors and other monthly utilities can be classified as current liabilities. Long-term liabilities, on the other hand, refer to an entity’s debts that are payable over a long period, usually in years (Scott, 2015). For example, a mortgage payment can be classified as a long-term liability since the maturity date usually ranges between five and ten years. Moreover, pensions are long-term liabilities since the financial obligation to the organization covers some years. The long-term liabilities are subdivided into small portions, which are settled progressively over the period
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The classification of liabilities is important for a company as a going concern. It would not be possible for any entity to meet all the financial obligations at once (Scott, 2015). By classifying these obligations as per their maturity dates, a company can take advantage of the arising opportunities as well as achieve both long-term and short-term goals. This is also important in showing the real value of the company because long-term liabilities are considered during valuation. The practice can help potential investors when making their decisions on whether to invest or not.
References
Scott, W. R. (2015). Financial accounting theory . New York NY: Prentice Hall.
