Classifying Liabilities

Liabilities are classified in a similar manner.

Liabilities are considered to be current liabilities if the obligation is to be settled within 1 year or with in the current accounting period.

These debts are usually settled with the payment of current assets.
Examples of current liabilities are the following:

1. Accounts Payable
2. Taxes Payable
3. Salaries Payable
4. Water and Power Payable
5. Notes Payable (if the obligation is due with in 1 year)

Following current liabilities on the balance sheet are long-term liabilities, which are usually payable in more than a year.

Examples of long-term liabilities are:

1. Bonds Payable
2. Mortgages Payable

In the year in which a long-term liability becomes payable, it is usually converted to a current liability ( appearing under the current liability heading of the balance sheet).

Types of Liabilities

Liabilities - Debts, amounts owed to creditors

1. Current Liabilities - Liabilities that will be paid with current assets within one year or one operating cycle, whichever is longer.

Accounts Payable - Amounts owed creditors that result from the purchased of goods or services on account.

Notes Payable - Written promises in the hands of the makers, that serve as evidence of debts. If due within one year or one operating cycle, whichever is longer.

Interest Rate Payable - A percentage of the principal that is paid for the use of money borrowed.

Interest - Money paid for the use or borrowing of money.

Unearned Revenue - Advance payment for services that still must be performed. Unearned revenue represents a liability or obligation of the company receiving the payment for a service not yet rendered.

2. Non Current Liabilities - In general liabilities that have a due date more than a year beyond the balance sheet date or beyond one operating cycle, whichever is longer, are classified as non current source is considered non current, whatever the due date. There are several accounts that are classified as noncurrent liabilities, such as mortgages payable, Bonds Payable, Long-term Notes Payable.

Accounting Equation

ASSETS = LIABILITIES + OWNER'S EQUITY

Assets - Properties (Resources) of value owned by a business.

Liabilities - Debts, amounts owed to creditor

Ownership - Is the exclusive right to posses, use, enjoy, and dispose or property.

Equity - Is the owner's contributions to the business.
Equity represents the noncurrent obligations of the entity to the owners. Because equity equals the amount of assets remaining after subtracting liabilities.
Equity is sometimes called net assets. (the term "net" indicates that at least one amount has been subtracted from another to reach this final amount).