Financial Liability
What is financial liability ?
A financial liability is any money owed to another party. Common personal liabilities include home mortgages and student loans, while common business liabilities include accounts payable and deferred revenue.
Key Features of Financial Liabilities
Key Features policy covers:
- Monetary Obligation. Financial liabilities always involve money.
- Fixed or Flexible Terms. Some financial liabilities follow fixed repayment terms (like monthly EMIs).
- Interest Charges.
- Legal Enforcement.
What are the characteristics of financial liabilities?
A financial liability is any money owed to another party. Common personal liabilities include home mortgages and student loans, while common business liabilities include accounts payable and deferred revenue. Liabilities can be short-term, such as credit card debt, or long-term, such as mortgages.
Who needs financial accounting?
Buyers:
Public companies are required to perform financial accounting as part of the preparation of their financial statement reporting. Small or private companies may also use financial accounting, but they often operate with different reporting requirements.
How to identify financial liabilities
A financial liability is any money owed to another party. Common personal liabilities include home mortgages and student loans, while common business liabilities include accounts payable and deferred revenue. Liabilities can be short-term, such as credit card debt, or long-term, such as mortgages.
Many businesses use financial liability reporting services to prepare their annual financial statements. These services follow GAAP standards and report most liabilities on the balance sheet portion of the financial statements. Some liabilities are nearly impossible to avoid. For example, if you want to purchase a home, you’ll likely need a home mortgage, which is a liability. For businesses, liabilities are also essential. For instance, businesses often purchase supplies and raw materials on credit, which is a liability. Or it might have to take out a loan to expand the business, which is another liability.
Investors and lenders can use information from the company’s financial statements to assess its financial stability. In most cases, it’s better for companies to have a higher level of equity than liabilities. However, it’s even more important for the business to have enough revenue coming in to cover its debt responsibilities.
Financial liabilities vs. assets
While both assets and liabilities are reported on a company’s balance sheet, they’re very different. Assets are something the company owns and can be classified as tangible or non-tangible. Tangible assets are those that you can touch, such as buildings and equipment. Intangible assets include accounts receivable and intellectual property rights. On balance sheets, assets are typically listed as current and noncurrent.
On the other hand, liabilities are debt obligations the company owes, such as accounts payable and loans. On a balance sheet, the sum of all company assets must match the sum of all liabilities plus the owner’s equity: Assets = Liabilities + Owner’s Equity.
Financial liabilities vs. expenses
Expenses and liabilities may seem similar since they both involve the purchase of goods and services. However, these two financial terms are not the same and are treated differently on financial statements.
An expense is money that’s already paid for specific goods or services. Personal expenses include items such as rent, utilities and food costs. Expenses for businesses are costs involving activities of daily operations, such as the cost of labor, building maintenance and marketing.
What is a financial liability, then? Rather than an expense, a liability is an obligation that the company must pay in the future. While these goods and services may play a role in daily operations, a company cannot list a liability as an expense until it’s paid for.
