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Personal Finance

What are your financial liabilities?

In terms of accounting, financial liability is something that you owe to another party. Financial liability is typically contrasted with a financial asset which is something of value that you own. Liabilities include loans and debts outstanding, such as credit card and auto loan debts.

All financial liabilities are recognized in the balance sheet. Subsequent to initial recognition, most financial liabilities are calculated at the original recorded amount less principal repayments and amortization.

Liabilities can be broadly classified into two types – current liabilities and long-term liabilities. Current liabilities are those debts which are payable within a year such as your credit card debt and any loan balances you may have. Long-term liabilities are those you pay over a long period of time. Long-term liabilities include issued long-term bonds, long-term leases, notes payables, pension obligations, and long-term product warranties.

Let us look in detail what are your financial liabilities.

Current Liabilities

Current liabilities are those debts you owe to someone and which must be paid within one year. Current liabilities are just opposite of current assets. Current liabilities consist of things such as short term loans, accounts payable, bonds payable, dividends and interest payable, consumer deposits, and reserves for Federal taxes.

Accounts Payable

Accounts payable are the unpaid bills of the business. Accounts Payable can be defined as the monies the company owes for any goods or services received, but not yet paid for. That is, the money that the company currently owes to the suppliers, the company partners and its employees.

Short Term and Current Long Term Debt

Short term and current long term debt are considered as the most important item under current liabilities. In most cases, they represent a company’s bank loans.

Other Current Liabilities

Depending on the company, you can see there are various other current liabilities listed in the balance sheet. Generally these current liabilities will be lumped together under the title ‘other current liabilities’. This is because if a business lists ‘Commercial Paper’ or ‘Bonds Payable’ as a current liability, the company is deciding to pay the amount listed to the company’s bond holders in the short term.

You must be aware of your financial liabilities and financial assets to calculate your financial net worth. This is important because net worth is the difference between your financial assets and financial liabilities. Sometimes while calculating your net worth, your financial liability will be higher that your financial assets. That is, the result is your net worth, your overall financial position, will show negative results. A negative net worth indicates that you have greater financial liabilities than assets. If you have negative net worth don’t get worried because financial net worth will change periodically, depending on the appreciation or depreciation of your possessions and property. But adjusting your expenses and thereby reducing your financial liability your can change your negative net worth to a positive one.