Liability is the debt of a business or an organization that has a specified time to pay off. According to the pay off period, the liability is divided into short-term, (provided for up to one year) and long-term, (provided for a period longer than one year). Liability represents the obligations of the organization with other entities.
Liability is divided into:
- Current Liabilities
- Short-term bank loans
- Short-term debt
- Supplier credit (supplier delivers the goods on credit)
- Buyer credit (advances received from customers)
- Liabilities to employees (amounts of not yet paid wages and salaries)
- Unpaid taxes
- Accrued Expenses
- Long-term Liabilities
- Long-term bank loans
- Long-term debt
- Term loans
- Issued corporate bonds
- Promissory Note, Bill of Exchange
- Reserves - are intended to finance unforeseen expenditures in the future
Use of the liability in practice: liabilities are used in the organizations to bridge the period of time, during which they can’t manage with their equity. Liabilities may even be cheaper than equity because interest may reduce the payment of taxes. The use of liability works as leverage that raises the return on equity. Within the financial structure of the company it is required to assess and analyze the particular relationship between the equity and liabilities. The basic rate of the liability utilization is reflected in the balance sheet, for the detailed analysis, there are debt ratios.
If the organization wants to use the liability, it seeks primarily in the financial or capital market or turns to the market of private equity.
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