Definition of Liabilities – Liabilities are one of the most important financial components to support a company. What does liability mean? What are some examples? Check out the discussion in the following article.
Has Sinaumed’s ever felt confused because suddenly the debt being borne by the company is greater than income without knowing how the process happened? If so, learning about liability is an excellent solution so that Sinaumed’s doesn’t experience it again.
Even though it has a physical form and value, liabilities cannot be classified as assets. Unfortunately, until now there are still many entrepreneurs who fail to understand it. So what is meant by liability? What are the types? Here’s the explanation for Sinaumed’s .
What is Liability?
In running its business, companies incur various types of costs with the aim of running operations. It is used in large quantities, so that in general this fee is billable only in certain periods.
Apart from costs, many companies also have bills from external capital loans, or what is simply referred to as debt.
These two types of claims included in the profit/loss balance sheet reporting process are generally put together, and are named “liabilities”.
So if defined, liability is an obligation that is borne by the company, both internal and external, and must be paid immediately before payment is due.
Difference between Assets and Liabilities
Liabilities can have the same form and value as assets, both as capital and goods. This is what often makes entrepreneurs misunderstand and think that liabilities are the same as assets. In fact, assets and liabilities are two different things.
Assets are economic resources that are used to run business rates and ensure the added value of wealth for the company. There are two types of assets, namely:
- Current assets (easily liquidated), for example land certificates, machinery, buildings, brands , and so on.
- Non-current assets (difficult to liquidate), for example securities, receivables, cash, merchandise, and so on.
Meanwhile, liabilities are various economic resources used to carry out the pace of business that must be paid by the company to external parties within a certain time.
Liability cannot be abandoned, because it will certainly cause problems. Meanwhile, assets are the property of the company (or investors) so that they can be managed at will on the basis of the company’s progress.
Apart from what has been explained in the previous point, the differences in other assets and liabilities include:
Assets are financial resources that have future economic benefits. While liabilities are things that must be paid off in the near future.
The value of assets decreases or depreciates every year, while the value of liabilities will not decrease and may increase due to the enactment of the interest rate system.
When writing a balance sheet, assets are written on the right, while liabilities are written on the left.
Liability Characteristics
After understanding the meaning of liability, this time we will learn about the characteristics of liabilities, namely:
- Has a payment due date.
- As a transaction or event that has occurred so that it obliges the entity.
- Must be resolved by paying it off.
- Requires assets and other entities to settle liabilities.
Functions of Assets and Liabilities in Financial Statements
In a company’s accounting period, the smooth flow of assets and liabilities is the main component as a support to show the stability and long-term prospects of the company. In a company’s financial statements, liabilities or debt is one of the strategies of a company to develop its business consistently.
Types of Liabilities
Current liabilities are debts that must be settled by the company within one year or one accounting period. The decisions of companies that take out debt are generally based on strategic and mature calculations. This debt will be used as business capital which will provide greater profits for the future of the company.
The components included in the liability group are current liabilities and long term liabilities . Details regarding the liability component are as follows.
1. Short Term Debt (Current Liabilities)
Short-term debt or liabilities are debts that must be paid or repaid immediately by a company or in other words as a company obligation that has a payment limit of less than a year, for example per month, per quarter or per semester. The slowest time to pay off current liabilities is one year of the accounting bookkeeping period.
Another term used to refer to this liability is current debt, because the company has to pay it several times within one year.
The components included in current liabilities are as follows.
1. Account Payable
Trade payables in liabilities are debt decisions for the purchase of goods such as raw materials in order to expedite the company’s operational activities. Generally, this debt must be paid to suppliers or partner companies.
2. Notes Payable
Notes in liability short-term debt is a type of debt paid to the lender. This debt has a maturity or grace period of 30, 60, and 90 days according to the agreement that has been made before.
3. Accrued Interest Payable
Expenses that need to be paid in liabilities are types of liabilities that have a status that has not been paid off in a certain accounting period. The components in the accrued interest payable are rental costs, wages or salaries, and so on.
4. Unearned Revenue
This liability represents income from the company for its services to third parties. Payment of this debt has been received, but the income has not become the full property of the company so that it is still said to be debt.
5. Deferred Income (Deferred Liability or Deferred Revenue)
Deferred Revenue in liabilities, namely income received in advance for goods or services that have not been completed or delivered. For example, if goods or services have been delivered to consumers, then this component can only be referred to as revenue and included in the income statement.
6. Salaries Payable
This liability is a company obligation that is paid to all employees, but the total amount that must be paid has not been able to fulfill this obligation. Therefore, this component is included in the company’s debt to its employees.
7. Dividends Payable
Dividend liability is part of the company’s profit that has been determined to be distributed to shareholders in the form of dividends. Because this nominal has not been paid, it will be included in the debt section in the accounting balance sheet.
8. Tax Payable
Taxes payable in liabilities are obligations that must be paid by the company for tax calculations from all company assets in the form of buildings that have been used.
2. Long Term Liabilities
All debts whose repayment obligations are paid over a relatively long period of time or at least more than one year are long term liabilities . Long-term liabilities are obligations that must be paid by the company with a relatively long term, namely in one cycle of the company’s financial statements.
This liability can also be referred to as non-current debt, because the company cannot pay this obligation in less than a one-year period.
The components included in this type of liability are as follows.
1. Bank Loans (Bank Loans)
Bank debt in liabilities is loan funds from banks obtained by the company and used as company capital, such as for company mergers or business expansion activities.
2. Mortgage Payable
This liability represents the company’s loan debt with collateral in the form of fixed assets and fixed assets owned by the company.
3. Bonds Payable
Bonds are transferable medium-long term bonds. This letter serves as evidence stating that the investor or bondholder lent a certain amount of money to a business entity or company that issued it.
4. Noveltasi Credit (Long Term Loan)
Noveltasi loans in liabilities are company obligations obtained from banks or other financial institutions in the form of long-term loans.
5. Duration Debt (Subordinated Loan)
Duration debt is an obligation by the shareholders of the parent company that does not use an interest system.
6. Payable Lease
Payable leases in liabilities are debts originating from foreign companies to purchase fixed assets in which all payments are paid in installments over a relatively long period of time.
7. Debt of Shareholders (Holding Company Loan)
If a company has an affiliated company, the shareholder’s debt becomes an obligation that must be paid. This debt must be given from the parent company to affiliated companies and new subsidiaries as operational capital for the company’s business. In general, this liability can be paid in installments over a relatively long period of time.
Debt to Equity Ratio
The first liability component that must be analyzed is the debt to equity ratio (revenue/company value added). Before starting, ask Sinaumed’s himself the following: is the equity the company has acquired sufficient to pay all of its debts?
If the amount of debt reaches 50% or more, then the company’s finances are in an unhealthy condition. So that in the following year the company must try to reduce liabilities and increase equity.
Debt to Asset Ratio
The next liability analysis that Sinaumed’s needs to do is the debt to asset ratio. This component becomes more important, because it involves the company’s operational license.
If after analysis it is found that the amount of debt reaches 50% or more, then the assets of the Sinaumed’s company are at risk of being subject to a mortgage (if they fail to pay liabilities).
The ideal number to debt ratio is 40%, or less. The lower the ratio of debt to assets, the safer the company’s operations will be.
Examples of Company Liabilities
Liability is an accounting component that is not too difficult to understand, so Sinaumed’s can easily calculate the amount. However, to make it easier to understand liabilities, the following is an example of a company’s liabilities.
LIABILITIES FINANCIAL STATEMENTS
PT JAYA MAKMUR TBK.
December 31, 2020
SHORT-TERM LIABILITIES
Trade payables ¾ Third parties : 105,980,775
Other payables ¾ Third parties : 859,657
Taxes payable: 799,999
Accrued expenses: 50,956,390
Bank loans: 48,900,000
Long-term debt: –
Finance lease: 67,345,098
Other short-term liabilities: 5,991
Total short term liabilities: 274,847,910
LONG TERM LIABILITIES
Employee benefits liability: 49,553,900
Senior notes : 32,456,988
Bank loans: 85,688,900
Finance lease: 151,990,800
Total long term liabilities : 319,690,588
Overall total liabilities: 594,538,498
Examples of Short Term Debt Questions and Answers
The definition of short-term receivables is the obligation of a company whose settlement period is less than one year. Consider the following examples of short-term debt:
Examples of short-term accounts payable
PT Atos Empuk Jaya is a trading company that sells various software and hardware in the field of information technology. On March 20, 2021, the company sold its merchandise worth IDR 36,500,000 to Toko Ora Nyetrum using a credit system with payment terms of 3/10, n/45.
The cost of the product provided by the supplier to PT Atos Empuk Jaya is IDR 30,000,000. The question is how is the treatment of accounting records for buyers and sellers?
Answers and discussion:
Recording of accounting journals on the seller’s side:
(Debit ) Trade Receivable … IDR 36,500,000
(Credit) Sales…. IDR 36,500,000
(Debit) Cost of Goods Sold …. IDR 30,000,000
(Credit) Merchandise Inventory … IDR 30,000,000
Recording of accounting journals on the buyer’s side:
Merchandise Inventory…. IDR 36,500,000 (Debit)
Accounts Payable …… IDR 36,500,000 (Credit)
Examples of long term problems and solutions
Long-term debt is a company’s obligations with maturities of more than twelve months. To help understand this insight, consider the following examples of long-term debt problems:
Examples of long-term accounts payable
PT Lokita Baru is a trading company that has plans to develop marketing areas to increase sales turnover. All preparations were carried out carefully, starting from the infrastructure and other supporting facilities.
Question:
How does PT Lokita Baru record the bank’s long-term debt?
Answers and Discussion:
A: Calculating loan interest
= IDR 250,000,000 x 18%
= IDR 45,000,000
B: Perform debt accounting records
Cash ….. IDR 250,000,000 (Debit)
Interest expense …. IDR 45,000,000 (Debit)
Long-term debt …. IDR 250,000,000 (Credit)
Interest Debt…. IDR 45,000,000 (Credit)
Conclusion
Liability is something that cannot be avoided, especially for a newly developing company. However, if the liability management is well organized, then Sinaumed’s does not need to worry that the company will collapse due to too many liabilities.
Also Read:
- Recognize the Difference between Direct Investment and Not
- Definition of KPR: Types, Benefits and Considerations
- Monetary Policy Instruments: Definition, Types
- Understanding the Definition, Functions, and Types of Money
- Cash Equivalent Assets: Definition, Types, Purpose