30/11/2022 20:14 Liabilities in Accounting Examples & Formulas | How to Calculate Total Liabilities - Video & Lesson Transcript

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Liabilities in Accounting: Examples and Formulas

Understand the meaning of liabilities in accounting. Learn what total liabilities are in accounting and how to
calculate them using different examples.
Updated: 03/09/2022

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Definition
Total liabilities are the aggregate debt and financial obligations owed by a business to
individuals and organizations at any specific period of time. Total liabilities are reported on a
company's balance sheet and are a component of the general accounting equation: Assets =
Liabilities + Equity.

Practice Quiz
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Short-Term v. Long-Term Liabilities

Liabilities are usually reported in businesses as either short-term liabilities (or current liabilities)
and long-term liabilities. Short-term liabilities are liabilities that come due within a year.
Examples of short-term obligations include: wages and salaries, sales taxes, federal income
taxes, state income taxes, payroll taxes and retirement benefits.

Short term liabilities also include:

Accounts payable, which is money that is owed to suppliers for goods and services
Short-term notes payable or the financing obligations that you have to pay in a year, usually with
interests; the term 'note' refers to a promissory note, which is a special type of loan agreement
Accrued expenses the expenses that you owe but you have yet to have received an invoice for
payment
Unearned revenues, which is revenue you have received but have yet to deliver the goods or
perform the services to earn the revenue
Dividends payable, the dividends owed to shareholders but not yet paid
Advances, the money received on a contract for services you have yet to provide
Deposits, the money received to you by customers to guarantee that rental property is returned in
good condition

Long-term liabilities aren't due for over a year. Examples of long term liabilities include:
Credit lines, or the money loaned by a financial institution that you can draw upon as needed, as
opposed to a lump sum loan; for example, a company may have a credit line of $1,000,000 upon which
to draw as needed in any amount and frequency up to $1,000,000
Long-term notes payable, which is a promissory note with a maturity date that is more than a year
away
Bonds, which are negotiable (transferable) debt securities that a company may issue to raise money

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Activities
FAQs

Total Liabilities - A Practical Exercise:

The following exercise is designed to enable students to apply their knowledge on liabilities
in the real-life business context.

Case:
You are an accounting clerk for Boomer Music Co., a company that produces and sells
wireless headphones. Your team is working on the preparation of the 2019 financial
statements when you receive a call from your manager saying:

"I just spoke with the Chief Financial Officer. He told me that he is in deep negotiations with
the bank to re-finance our loans. However, the bank needs some financial information.
Since the audited financial statements will only be ready in a month, he asked that we
provide a detailed listing of all liabilities and compute the total liabilities amount. I'm
sending you our latest general ledger dump for our balance sheet accounts. It's not final yet
since we haven't yet adjusted for depreciation and other adjusting entries, but it'll have to
do for now. Can you take care of this?"

General Ledger Account Balance ($)

Accounts payable 50,000

Accounts receivable 5,000

Building 400,000

Loan on building due in 3 years 250,000

Prepaid insurance on building 23,000

Cash 37,000

Note payable to supplier due in 1 year 100,000

Share capital 10,000

Retained earnings 35,000

Sales taxes payable 15,000

Property tax refund receivable for over-payment 12 000

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30/11/2022 20:14 Liabilities in Accounting Examples & Formulas | How to Calculate Total Liabilities - Video & Lesson Transcript | Study.com
Property tax refund receivable for over payment 12,000

Payroll taxes payable 10,000

Wages accrued 40,000

Inventory 82,000

Note Payable to bank due in 2 years 25,000

Required:
Using the listing above, perform the following:

1. Develop a detailed listing of all liabilities and compute the total liabilities amount.

2. Classify each liability as either short-term or long-term.

Solution:
The solution for #1 and #2 is given as a combined answer in the table below.

General Ledger Account Balance ($) Short-Term or Long-Term

Accounts payable 50,000 Short-Term

Loan on building due in 3 years 250,000 Long-Term

Note payable to supplier due in 1 year 100,000 Short-Term

Sales taxes payable 15,000 Short-Term

Payroll taxes payable 10,000 Short-Term

Wages accrued 40,000 Short-Term

Note Payable to bank due in 2 years 25,000 Long-Term

Total 490,000

Additional Information

Liabilities Definition in Accounting

The definition of total liabilities in accounting refers to the aggregate financial obligations owed to another
person or entity. They are settled over a period throughout the transfer of economic benefits. This includes
paying the liability in monetary values or in the exchange of goods or services. For big companies, liabilities
are essential to manage the day-to-day operations. In addition to that, they are used to raise capital to
accelerate the value creation of the company. For example, the money raised using a liability can be used by a
company to finance a new project, buy a new building, or buy new machinery. Liabilities are usually reported
in the balance sheet, which refers to a financial statement that reports the assets, liabilities, and
shareholders' equity of a company at a given point of time.

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Types of Liabilities in Accounting

Liabilities in accounting have different classifications. On the balance sheet, liabilities are classified based on
their maturity and include current liabilities and non-current liabilities. This section will present the two main
classifications that constitutes total liabilities. In addition to that, this section will present negative liabilities,
provisions, and contingent liabilities.

Current Liabilities
Current liabilities, also referred to as short-term liabilities, are financial obligations that the company must
pay in less than one year. They are mainly used to manage operations and day-to-day activities. Examples
include the following:

Accounts payable: This account refers to the unpaid bills of suppliers. For instance, a restaurant
purchases 1,000 bottles of mineral water on credit at $1 per unit. Hence, the company reports an
increase in its current liabilities of $1,000.

Wages payable: It indicates the amount of money owed by the company to its workers that is not yet
paid. For instance, an employee worked ten hours during the weekend at $20 per hour and is not yet
paid. The company needs to report an increase in the wages payable account by $200.

Interest payable: As companies take loans from banks on the long-term, they need to pay periodic
installments (e.g., monthly payments) that include the principal and interest. Concerning the amount of
interest that is still not paid to the bank, it is reported under the interest payable account.

Unearned revenues: Sometimes companies are paid (either fully or partially) in advance for a good or
service that needs to be delivered in a future date. As long as the good/service is not delivered, the
company needs to report the monetary value received in the unearned revenues account in current
liabilities. For instance, a company received $5,000 today and promised to deliver ten wooden tables for
a restaurant in the next month. Today, the company needs to increase its unearned revenues account
by $5,000.

Non-Current Liabilities
Non-current liabilities, also referred to as long-term liabilities, are financial obligations due after one year.
These non-current liabilities need to exclude all payments and interest that must be paid in the short-term, as
they are already included in some current accounts of liabilities (e.g., interest payable). Non-current liabilities
are mainly used as a source of raising capital to finance large projects and to purchase factories, equipment,
and machinery that will generate income for the company.

Long-term debt: When companies raise capital through a long-term bank loan, they need to record the
face value in the long-term debt account and need to record the principal to be paid in this year in
current liabilities. For instance, a company takes a loan of $100,000 at a 7% interest rate and a 10-year
maturity. After computing the amortization table of the loan, the company records the remaining
balance after the installment of the first year ($92,762.25) in the long-term debt account, records the
principal due in the first year ($7,237.75) as a principal payable, and records the interest due in the first
year ($7,000) as an interest payable account.

Other classifications of liabilities

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Negative Liabilities:
Negative liabilities occur when a company pays more than the agreed upon amount. They are also referred
to as over payments. Usually, these negative liabilities are very small.

Contingent Liabilities
A contingent liability occurs only when an uncertain event is confirmed. For instance, a company has a
lawsuit and might be subject to pay a fine of $10,000 in the future. Usually, this type of liability is recorded in
the form of a note in the financial statements and not in a specific account.

Provisions
Provisions are recorded by companies to cover anticipated losses in the future in the case of uncertainty.
They are recorded when the company can reasonably estimate the losses and the loss is highly probable. For
example, and based on historical data, the company records a $1,000 liability as a provision for bad debt. This
means that the company estimates that some customers will not pay for the goods or services they received
that is estimated to be $1,000.

Total Liabilities Formula

The following section will present how to find total liabilities and how to calculate liabilities by providing the
total liabilities formula and applying it through some examples.

The total liabilities formula allows for calculating the total liabilities that the company owes. It is given such as:

Total Liabilities = Current Liabilities + Non-Current Liabilities

How to calculate total liabilities

An accountant is working for a restaurant and is required to calculate the total liabilities owed by the
company. The accountant is also required to report to the owner the liabilities that must be paid in the short-
term and the ones to be paid in the long term. Calculate the current liabilities, non-current liabilities, and total
liabilities using the following data:

During this year, the owner purchased vegetables from his/her supplier in which $5,000 is still not paid.

Initially, the owner took a loan of $50,000 to finance the machinery at a 5% interest rate and due in 5
years with yearly payments. Using this information, the accountant calculates the amortization table
and found that the principal due in this year is $9,048.74; the interest due in this year is $2,500, and the
remaining balance in the next year is $40,951.26.

The wages of workers is $15,000 but is not yet paid.

The owner received a reservation for a dinner at the restaurant that will be served in the next month
and received a full payment of $150.

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