Definition of Liability – In the business world, one thing and another usually have a relationship with one another. One of them is assets and liabilities that have a high relationship with the smoothness of the travel process of a business. In doing business activities, a company will definitely need assets.
While liability is a risk that should be taken by the company to develop the business that is being carried out. Even so, liability does not only exist in the form of debt or loan money. There are various forms of liability that Reader needs to be aware of. Compared to just guessing and assuming, Reader should read this article until it is finished to know the form of liability in detail.
Definition of Liability
Liability is an obligation that must be paid by a company to the relevant party by issuing a certain amount of funds or economic resources of the company. Generally, companies will take on liabilities to support all operational activities in their business.
That way, the expansion and development of a company can be done in a relatively faster time. When the company insists on not taking a risk by going into debt. Especially for companies that don’t have a lot of assets. So the development of the company has the potential to be hindered and not optimal.
As for the other meaning of a simpler liability, it is an obligation that is calculated equal to the value of money and must be paid by the company to the concerned party. The parties referred to here can be companies, individuals, cooperatives, banks, and other financial institutions. The point is, if according to accounting records, liability is a debt. Where in the accounting equation, liability is abbreviated as ALE by accountants.
The abbreviation has the abbreviation Assets, Liabilities, and Equity. Those three things are interrelated with each other. From that, there is an accounting equation that shows that assets come from the summation of liabilities and equity. Why does a company have a liability? It is related to the amount of assets owned by a company.
If all enterprises have few assets. So it is recommended to take responsibility. The purpose of that is as an effort so that the company can develop maximally. Because, when surviving with existing assets, it will automatically be difficult for the company to progress or grow. Reader needs to know that liability is not just in the form of money. But it can also be in the form of services, goods, or economic benefits in other forms. In addition, liability can also originate from various types of transactions. For example, from the exchange of assets, business relationships, and various transactions that can provide benefits for the company’s economy in the future.
In the science of financial accounting, liability is considered as an entity’s obligation that arises from a transaction or event in the past. The obligation in question is explained through the following characteristics:
1. Obligations are all types of debt or loans from banks or individuals aimed at increasing the company’s income.
2. In addition, an obligation is a responsibility from another party that requires settlement through the delivery of assets in the form of providing services and other transactions in the future and producing an economic benefit.
3. Obligation is a duty and responsibility on the related parties, whether to leave little or even not at all a policy in order to avoid settlement.
4. Lastly, an obligation is an event and transaction that has occurred and gives rise to the entity’s responsibility.
Difference between Liability and Burden
Liability and burden are often categorized as the same thing. But actually the two are very different. Liabilities are usually in the form of debt used by companies to obtain assets for operational needs. For example, when a company buys tools for production that are used in the manufacture of products. Then the payment is made using a loan, then the transaction is classified as a liability.
As for the burden, which includes ongoing payments for something that has no real value and is used to get profit or income. One example that can be used as an illustration is the cost incurred to pay for advertising with the aim of attracting customers. In addition, burdens and liabilities are generally listed in different places in the financial statements. Where liabilities are usually written on the financial balance sheet, while burdens are written on the profit and loss statement.
Types of Liability
In general, liabilities will appear and be recorded in the balance sheet of the financial statement written at the end of the period. The purpose is to identify the financial condition of a company during that period. Usually, put the liabilities in the financial statements in the right column along with the equity entries. Where in the recording, liabilities are in the order that has been determined. The following are 2 types of liability that Reader needs to know about in the financial report of a company or business. Watch until it’s finished.
1. Long Term Liability
The first type of liability is long-term liability. That means, the period determined for the payment of the obligation is expected to last for more than one year. Examples of long-term liabilities are debts in the form of mortgages, debt obligations and cash loans.
2. Short Term Liability
The second type of liability is short-term liability. This type of liability is often referred to as current liability. This can be interpreted as an obligation that is expected to be resolved within a short period of time or no more than a year. The following are some examples of short-term liabilities:
a. Sales Tax Obligations
Sales tax liability is also included in debt or liability. Where it is the accumulation of sales tax that can be obtained from consumers and held until the due date before it is paid to taxation.
b. Income Tax Liability
Of course we know that there are some companies that cut their employees’ salaries to be used as income tax. The deduction will usually be collected and stored until the time is deposited to the state taxation.
c. Mortgage Debt and Loan Fund
If previously the two debts were included in the example of long-term liability, then now they are present as an example of the type of short-term liability. This can happen when the payment is made in installments per month. That way, payments under 12 months will be categorized as short-term liabilities.
Apart from the 2 types of liabilities that have been mentioned above, there are actually still other types, namely capital. Capital is a type of liability that comes from the difference between assets and debts owned by a company. Capital is also included in the type of contingency liability. That means, whether or not there is an obligation depends on the events that will happen in the future. Therefore, the maturity of a liability of this type will never be predictable. So it is not surprising if there are not many company owners who take this type of liability. For example, the type of liability includes, among others, a warranty for a product, lawsuits through legal channels, and others.
Characteristics of Liability Is
For Reader who have been struggling in the business field for a long time or who have just started a business, they will certainly be very familiar with the term liability. This is because of the characteristics it has. Here are some characteristics of liability that need to be understood:
1. All loans used to increase personal or company income, be it from banks, individuals, or others must be paid at the same time when it is due.
2. All kinds of obligations that must be paid to other parties, whether it is the exchange of assets, cash transfers, the provision of services or services, and other activities that provide economic benefits in a period that has been determined in accordance with an agreement or at the time of a certain business event.
3. Business events or transactions that have already taken place and require the entity.
4. A form of entity’s responsibility to other parties, either those who abandon a policy or those who do not avoid settlement efforts.
How to Analyze Business Liability
Having a liability report on a company can also be used as one of the indicators of the company’s financial health. Therefore, writing and recording must be detailed and detailed, neat, and structured. The following are two ways that can be used to analyze liabilities in a company:
1. Through the Ratio of Debt to Assets Owned by a Company
When Reader uses this one method, then what needs to be ascertained is how many assets the company owns that can be used to meet and cover the obligations or liabilities. We can calculate by using the percentage of the total amount of debt and make sure that the total or amount is less than 50%. If the total of all debts owned can be covered by using the total business assets owned by a company. So it is most likely that the company will still be able to operate.
2. Using the Debt to Equity Ratio
The second way is to use the debt to equity ratio. Here we have to calculate the whole of the debt with the equity owned by the company. Make sure that the result of the ratio of debt to equity is not more than 50%. However, if the reality is more than 50%, then that is when the company should reduce the amount of liabilities or debts owned. So, liability is not something bad for a company or business. There was a time when it actually became one of the ways to achieve success.
As for the thing that needs to be understood, that is to keep control of the amount of liability so that it does not exceed the limit of the company’s ability to pay it. Because, the main purpose of using liability is to be able to develop a company or business, not to make it bankrupt due to a lot of debt.
Therefore, make neat, detailed, and structured notes for all liabilities owned. With these records, we can monitor and pay attention to the business position and also the company’s financial condition. In addition, liability can also give us the opportunity to develop our business to the maximum. However, we must ensure that the company can pay the obligation on time. So that when we need more liability, it will be easier to get it.
Examples of Liability
So that Reader gets a clear picture of what liability is. The following is an example of a liability case in a company:
Let’s just say, Andi is an employee at PT Maju Jaya. In May 2021, He received a salary of Rp. 7,000,000, then a child allowance of Rp. 800,000, and an allowance for transportation of Rp. 1,500,000. Not only that, to take care of Andi’s well-being, PT Maju Jaya also has to pay accident insurance amounting to Rp. 250,000, death insurance amounting to Rp. 100,000, and also an old age allowance of Rp. 300,000. So that the gross salary that Andi will receive is Rp. 9,950,000.
After that, Andi’s salary was cut by Rp. 400,000 to be used as a pension fund, Rp. 200,000 for zakat needs, Rp. 2,500,000 to pay the house installment to the Bank, and Rp. 425,000 PPh 21. Thus, Andi’s net salary in May 2021 is Rp. 6,425,000.
From the analysis above, the obligation that must be given to Andi and applies as long as Andi is still working at PT Maju Jaya is Rp. 9,950,000.
From the explanation above, we can conclude that liability is one of the things that can be used or used by a company to develop their company to the maximum. Company owners who insist on not taking liability can potentially hinder the growth and development of their own company and become suboptimal.
However, it should be understood that liability is different from burden as explained above. Where liabilities are usually used to acquire assets to meet operational needs. While burden is usually used for something that has no real value but has the potential to increase income.
From the explanation above, liabilities have 3 types which are categorized based on the time of payment. The first is Short Term Liabilities that mature in less than one year. The second is Long Term Liabilities that mature in more than one year. The third is Contingency Liability, this is an extraordinary debt that is done under special conditions only.
Calculation of liabilities using the ratio of debt to assets and to equity can make companies feel overwhelmed when done manually. Especially if the company takes many types of liability. In order to minimize mistakes, the company needs a special application as a supporter of online disability.
Well, that’s an explanation of what liability is in a company and what its benefits are for business development. For Reader who are struggling in the business field, the explanation above will certainly be very helpful in understanding the various ways to make the company and business more advanced.