We explain what liabilities are, how these types of accounting obligations are classified and their relationship with assets and equity.
What is the liability?
In financial accounting, a liability is understood to be the obligations of a person or company, that is, their debt with various types of creditors. The liability is then the opposite of the asset, which represents the assets and financial rights owned by said person or company.
In this sense, liabilities include all contractual commitments and debts, collected in promissory notes, payment commitments, consumption pending settlement, wages payable, taxes generated, etc. and all of them must be discounted from the net worth of the company or person, since they are capital outflows (investments or losses).
The liabilities of a company are part of the clarified information in a balance sheet (accounting balance), where they must be distinguished from assets.
They are, together with the net worth, the possible sources of financing of a company, being the liabilities always a form of external or external financing (indebtedness).
Therefore, the payment of liabilities is usually prioritized to acquire solvency, and often the record of them of a company or a person serves as a reference for your credit evaluation and other important financial procedures.
Liability classification
Liabilities can be of several types:
- Current liabilities. It covers the total debts, documented or not, that the person or company has with third parties, a product of external financing. These liabilities entail short or long-term obligations (classified as short or long-term liabilities, therefore), depending on the stipulated date of cancellation of the debt, that is, the moment in which payment is required.
- Non-callable liability. This concept would cover the total reserves and equity of a company that cannot be disposed of as they belong to shareholders, but that cannot be required by them either. However, many accountants disagree with the existence of this.
- Contingent liability. An obligation arising from past events, which may or may not materialize in the future depending on certain conditions, and which may or may not become a specific payment obligation.
Relationship between assets, liabilities and equity
We already know that assets and liabilities represent respectively the holdings and income and the debts and expenses of the accounting of a company or any person. For its part, equity is the sum of the owners’ contributions, after deducting operating expenses and losses; that is to say, it is the total of what is had as social capital in a company, once the losses were discounted and the profits (or gains) were added.
Said patrimony is therefore made up of patrimonial elements, which are the list of the different assets and liabilities to be taken into account.
It is called Equity, then, to the sources of own financing that a company or person owns, that is, to the own resources that it has without third party financing (which generates a liability).
So that:
- The asset is the set of assets owned, as well as their rights of use and transformation, capital, debts receivable. They are the destination (the use) of the financial means and the economic structure of the company.
- Liabilities and equity are the sources of financing, external and internal respectively, available to undertake a project. They are the source (origin) of the financial means, and make up the financial structure of the company.
Hence, the equity balance of a company is achieved by comparing or comparing its economic structure (active) and its financial structure (liabilities + equity). Also, the following numerically quantifiable relationships may occur:
- Assets = Liabilities + Equity
- Equity = Assets – Liabilities