Liabilities

Liabilities are debts owed by the business, representing a future sacrifice of economic benefits. This is because the debtor must give up economic resources such as cash/assets in the future to settle these obligations.

They comprise of current and long-term/non-current liabilities.

Current liabilities refer to liabilities whose final payment is due within a year. Conversely, long-term liabilities refer to final payment that occurs after a year.

Current Liabilities

They include accounts payable (AP), notes payable and interest payable.

Notes payable refer to other loans made to the company.

Interest payable refer to interest payments on loans due in the current period of a year.

Accounts Payable

Accounts Payable refers to money owed by a company to its suppliers for goods/services purchased on credit. This is in contrast with Accounts Receivable, which represents money owed to the company by customers.

AP can be used to finance a company as by negotiating longer payment terms with suppliers, they can retain cash for longer, using supplier credit as an interest-free short-term financing source. This financing is done by vendors who sell goods/services to the company on credit terms.

AP often result from Inventory purchases on credit. As a company acquires inventory from suppliers, it creates AP until payment is made.

Non-current Liabilities

They include bonds payable, mortgage payable, and bank loans - long-term notes payable.

Bonds payable refer to long-term debt securities issued by a company to raise capital, with an obligation to pay interest and return principal at maturity.

Mortgages payable refer to long-term loans secured by real property (land or buildings) that must be repaid over time.

Notes payable refer to written promises to pay a specific sum of money at a future date, typically with interest.