If assets5 are the resources your company owns that contribute to its economic value, liabilities are its exact opposite. In fact, liabilities are just that — things your company is responsible for by law, especially debts or financial obligations.
For example, any debt accumulated by a business in the course of starting, growing, and maintaining its operations is a liability. This could include bank loans, credit card debts, and monies owed to vendors and product manufacturers.
Liabilities, like assets, can be divided into subcategories. The two primary types of liabilities are often referred to as current liabilities and non-current liabilities.
1.) Current Liabilities - This type of liability refers to immediate debts that must be repaid within one year. For example, money owed to suppliers or vendors would be a current liability.
2.) Non-Current Liabilities - Also referred to as long-term liabilities, this category encompasses debts or obligations that your company must repay in over a year’s time. For example, non-current liabilities would include things like business loans, deferred tax liabilities, mortgages, and leases.
Bringing assets and liabilities together, we arrive at a company’s balance sheet. This document subtracts the company’s total liabilities from its total assets in order to arrive at the company’s net worth. Again, assets would include the current and fixed assets your company has on hand. Meanwhile, liabilities would include outstanding debts or obligations. By subtracting what you owe from what you own, you can determine your company’s net worth, and arrive at a comprehensive snapshot of the company’s financial situation at a given moment.