# Liabilities

Accounting ·

Updated on

Assets, liabilities and equity are three basic building blocks that form the balance sheet equation and any investor should have a deep understanding of what they mean. In this article, we’ll explain what liabilities are and we’ll also provide a real example using a balance sheet of a public company.

## What are Liabilities?

Liabilities are defined as anything of value that a company owes to somebody (another companies, governments or individuals). Liabilities are often understood as the same thing as debt, i.e. financial obligations. Almost any company has some kind of liabilities on its balance sheet.

## Formula

To calculate the value of company’s liabilities, given its assets and owner’s equity, use the following formula:

$$L = A - E$$

Where:

• L: Liabilities
• A: Assets
• E: Owner’s (shareholders’) equity

## List of Liabilities

Here are the typical examples of liabilities that you might find in companies’ balance sheets:

• Accounts payable
• Bills payable
• Interest payable
• Income taxes payable
• Bank account overdrafts
• Accrued expenses
• Short-term loans
• Long-term notes payable
• Bonds payable
• Deferred tax liabilities
• Mortgage payable
• Capital leases

Commonly, a firm would have just a few liabilities from the list above, and in some cases, those liabilities can have slightly different names depending on the company’s policies, procedures, government requirements, and the nature of its operations.

## Real-life Example of Liabilities

As with our assets example, let’s open the real balance sheet of Apple company to check how they record their financial liabilities. We’ll be looking at Apple’s annual 10-K report for 2019 that can be found here.

➤ Read also: How to Read an Annual Report?

Go to the “Financial Statements” (item 8) and open the “Consolidated Balance Sheets” on page 34.

Apple has just a few types of liabilities listed (in millions of U.S. dollars):

Apple’s liabilities are totaling 248,028 as of 2019, but what does this number tell us? To understand liabilities we have to know the company’s assets as well, which are equal to 338,516 for the same period, so the net owner’s equity would be 90,488.

As you can see, Apple’s annual report is quite clear and easy to understand, which might not always be the case when you analyze such a report. Note that it’s common for a company to allocate a significant portion of liabilities (and assets too) in the “others” section. Companies do that because the balance sheet is a formalized document that should have specific entries, a company can’t report a type of liabilities that an outsider wouldn’t understand. However, within the company, there might be many specific types of entries which general public doesn’t have to know about, but in the final public report these things are recorded just as “others”. If an investor is interested to see the exact structure of those “other” assets or liabilities, they usually can be found in a different part of the report.

Note that Apple has the same liability “term debt” in both current and non-current sections because some of those liabilities are due to be paid soon (one year or less) and others have to paid later.

## Liabilities in Personal Finance

Liabilities are not always about firms, companies, business, and corporations. They also apply to personal finance as well. Any kind of debt or a loan is someone’s liability until the moment it’s fully paid. So, a mortgage, a credit card debt or any other kind of loan is recorded as a liability in a person’s bank statement. Thus, understanding what liabilities are and how they function is important not only for an accountant with a financial degree but for literally anybody who lives in the modern world and use money. Sadly, the general public has a very vague understanding of liabilities and personal finance in general.

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