Definition of LIABILITIES
What a company owes to its creditors. In other words, debts.
Debts that the business owns.
Amounts owed by the company.
Amount owed for salaries, interest, accounts payable and other debts due within 1 year.
Amount owed for leases, bond repayment and other items due after 1 year.
Value of leases, future employee benefits, deferred taxes and other obligations
not requiring interest payments that must be paid over a period of more than 1 year.
Bills a company must pay within the next twelve months.
Bills that are payable in more than one year, such as a mortgage or bonds.
Amounts due and payable by the business within a period of 12 months, e.g. bank overdraft, creditors and accruals.
Amounts owing after more than one year.
Current means that these liabilities require payment in
the near term. Generally, these include accounts payable, accrued
expenses payable, income tax payable, short-term notes payable, and
the portion of long-term debt that will come due during the coming year.
Keep in mind that a business may roll over its debt; the old, maturing
debt may be replaced in part or in whole by new borrowing.
See operating liabilities.
Debts or other obligations coming due within a year.
Total liabilities exceed total assets. A firm with a negative net worth is insolvent on
Also called the quick ratio, the ratio of current assets minus inventories, accruals, and prepaid
items to current liabilities.
Also called surplus management, the task of managing funds of a financial
institution to accomplish the two goals of a financial institution:
1) to earn an adequate return on funds invested, and
2) to maintain a comfortable surplus of assets beyond liabilities.
Also called the statement of financial condition, it is a summary of the assets, liabilities, and
Total Assets = Total liabilities + Total Stockholders' Equity
A company's book value is its total assets minus intangible assets and liabilities, such as debt. A
company's book value might be more or less than its market value.
The makeup of the liabilities and stockholders' equity side of the balance sheet, especially
the ratio of debt to equity and the mixture of short and long maturities.
An annual statement filed by a life insurance company in each state where it does
business in compliance with that state's regulations. The statement and supporting documents show, among
other things, the assets, liabilities, and surplus of the reporting company.
A legal "person" that is separate and distinct from its owners. A corporation is allowed to own
assets, incur liabilities, and sell securities, among other things.
Current time to maturity on an outstanding debt instrument.
Current / noncurrent method
Under this currency translation method, all of a foreign subsidiary's current
assets and liabilities are translated into home currency at the current exchange rate while noncurrent assets
and liabilities are translated at the historical exchange rate, that is, the rate in effect at the time the asset was
acquired or the liability incurred.
Indicator of short-term debt paying ability. Determined by dividing current assets by current
liabilities. The higher the ratio, the more liquid the company.
A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to cover tax liabilities that have not yet been paid.
An excess of liabilities over assets, of losses over profits, or of expenditure over income.
For any entity, the difference between the market value of all its assets and the market
value of its liabilities.
Decisions concerning the liabilities and stockholders' equity side of the firm's balance
sheet, such as the decision to issue bonds.
The ratio of a pension plan's assets to its liabilities.
A firm that is unable to pay debts (liabilities are greater than assets).
An interest rate swap used to alter the cash flow characteristics of an institution's liabilities so
as to provide a better match with its assets.
A bank runs a matched book when the distribution of maturities of its assets and liabilities are equal.
1) Acquisition in which all assets and liabilities are absorbed by the buyer.
2) More generally, any combination of two companies.
Composed of currency and coins outside the banking system plus liabilities to the deposit money banks.
The difference between total assets on the one hand and current liabilities and noncapitalized longterm
liabilities on the other hand.
Net working capital
Current assets minus current liabilities. Often simply referred to as working capital.
Overfunded pension plan
A pension plan that has a positive surplus (i.e., assets exceed liabilities).
Compares a stock's market value to the value of total assets less total liabilities (book
value). Determined by dividing current stock price by common stockholder equity per share (book value),
adjusted for stock splits. Also called Market-to-Book.
Method of accounting for a merger in which the acquirer is treated as having purchased
the assets and assumed liabilities of the acquiree, which are all written up or down to their respective fair
market values, the difference between the purchase price and the net assets acquired being attributed to goodwill.
Indicator of a company's financial strength (or weakness). Calculated by taking current assets
less inventories, divided by current liabilities. This ratio provides information regarding the firm's liquidity
and ability to meet its obligations. Also called the Acid Test ratio.
The surplus as measured using regulatory accounting principles (RAP) which may allow
the non-market valuation of assets or liabilities and which may be materially different from economic surplus.
An accounting entry that properly reflects the contingent liabilities.
This is a company's total assets minus total liabilities. A company's net worth is the
The surplus of an insurance company determined by the accounting treatment of both
assets and liabilities as established by state statutes.
The residual claims that stockholders have against a firm's assets, calculated by
subtracting total liabilities from total assets.
Structured portfolio strategy
A strategy in which a portfolio is designed to achieve the performance of some
predetermined liabilities that must be paid out in the future.
Liquidating an existing position and simultaneously reinstating a position in another futures
contract of the same type. Symmetric cash matching An extension of cash flow matching that allows for the
short-term borrowing of funds to satisfy a liability prior to the liability due date, resulting in a reduction in the
cost of funding liabilities.
Symmetric cash matching
An extension of cash flow matching that allows for the short-term borrowing of
funds to satisfy a liability prior to the liability due date, resulting in a reduction in the cost of funding liabilities.
Tax anticipation bills (TABs)
Special bills that the Treasury occasionally issues that mature on corporate
quarterly income tax dates and can be used at face value by corporations to pay their tax liabilities.
Under this currency translation method, the choice of exchange rate depends on the
underlying method of valuation. Assets and liabilities valued at historical cost (market cost) are translated at
the historical (current market) rate.
Total debt to equity ratio
A capitalization ratio comparing current liabilities plus long-term debt to
Underfunded pension plan
A pension plan that has a negative surplus (i.e., liabilities exceed assets).
If the average maturity of a bank's liabilities is less than that of its assets, it is said to be
running an unmatched book. The term is commonly used with the Euromarket. Term also refers to the
condition when a firm enters into OTC derivatives contracts and chooses to hedge that risk by not making
trades in the opposite direction to another financial intermediary. In this case, the firm with an unmatched
book hedges its net market risk with futures and options, usually.
Related expressions: open book and short book.
Defined as the difference in current assets and current liabilities (excluding short-term
debt). Current assets may or may not include cash and cash equivalents, depending on the company.
Working capital management
The management of current assets and current liabilities to maximize shortterm liquidity.
A ratio that shows how well a company could pay its current debts using only its most liquid or â€śquickâ€ť assets. Itâ€™s a more pessimisticâ€”but also realisticâ€”measure of safety than the current ratio, because it ignores sluggish, hard-toliquidate current assets like inventory and notes receivable. Hereâ€™s the formula:
(Cash + Accounts receivable + Marketable securities) / (Current liabilities)
A â€śsnapshotâ€ť statement that freezes a company on a particular day, like the last day of the year, and shows the balances in its asset, liability, and stockholdersâ€™ equity accounts. Itâ€™s governed by the formula:
Assets = liabilities + Stockholdersâ€™ Equity.
A ratio that shows how many times a company could pay its current debts if it used its current assets to pay them. The formula:
(Current assets) / (Current liabilities)
RATIO OF DEBT TO STOCKHOLDERSâ€™ EQUITY
A ratio that shows which groupâ€”creditors or stockholdersâ€”has the biggest stake in or the most control of a company:
(Total liabilities) / (Stockholdersâ€™ equity)
The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.
A financial statement showing the financial position of a business â€“ its assets, liabilities and
capital â€“ at the end of an accounting period.
The shareholdersâ€™ investment in the business; the difference between the assets and liabilities
of a business.
Purchases of goods or services from suppliers on credit to whom the debt is not yet paid. Or a
term used in the Balance Sheet to denote current liabilities.
Generic types of assets, liabilities, income or expense that are common to all businesses and
used as the basis of financial reporting, e.g. rent, salaries, advertising etc.
Estimates of possible future liabilities that may arise.
Current assets less current liabilities. Money that revolves in the business as part of the process of buying, making and selling goods and services, particularly in relation to debtors, creditors, inventory and bank.
The formula Assets = liabilities + Equity.
One of the basic financial statements; it lists the assets, liabilities, and equity accounts of the company. The Balance Sheet is prepared using the balances at the end of a specific day.
A method of preparing the operating section of the Statement of Cash Flows that does not use the companyâ€™s actual cash inflows and cash outflows, but instead arrives at the net cash flow by taking net income and adjusting it for noncash expenses and the changes from last year in the current assets and current liabilities.
An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + ownersâ€™ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capitalâ€”liabilities and ownersâ€™ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.
Short-term, non-interest-bearing liabilities of a business
that arise in the course of its activities and operations from purchases on
credit. A business buys many things on credit, whereby the purchase
cost of goods and services are not paid for immediately. This liability
account records the amounts owed for credit purchases that will be paid
in the short run, which generally means about one month.
Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. Recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has many assets other than cash, as well as
many liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
systemâ€”one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.
accrued expenses payable
The account that records the short-term, noninterest-
bearing liabilities of a business that accumulate over time, such
as vacation pay owed to employees. This liability is different than
accounts payable, which is the liability account for bills that have been
received by a business from purchases on credit.
acid test ratio (also called the quick ratio)
The sum of cash, accounts receivable, and short-term marketable
investments (if any) is divided by
total current liabilities to compute this ratio. Suppose that the short-term
creditors were to pounce on a business and not agree to roll over the
debts owed to them by the business. In this rather extreme scenario, the
acid test ratio reveals whether its cash and near-cash assets are enough
to pay its short-term current liabilities. This ratio is an extreme test that
is not likely to be imposed on a business unless it is in financial straits.
This ratio is quite relevant when a business is in a liquidation situation
or bankruptcy proceedings.
A term often used instead of the more formal and correct
termâ€”statement of financial condition. This financial statement summarizes
the assets, liabilities, and ownersâ€™ equity sources of a business at a
given moment in time. It is prepared at the end of each profit period and
whenever else it is needed. It is one of the three primary financial statements
of a business, the other two being the income statement and the
statement of cash flows. The values reported in the balance sheet are the
amounts used to determine book value per share of capital stock. Also,
the book value of an asset is the amount reported in a businessâ€™s most
recent balance sheet.
A street-smart term that refers to the practice by many businesses
of recording very large lump-sum write-offs of certain assets or
recording large amounts for pending liabilities triggered by business
restructurings, massive employee layoffs, disposals of major segments of
the business, and other major traumas in the life of a business. Businesses
have been known to use these occasions to record every conceivable
asset write-off and/or liability write-up that they can think of in
order to clear the decks for the future. In this way a business avoids
recording expenses in the future, and its profits in the coming years will
be higher. The term is derisive, but investors generally seem very forgiving
regarding the abuses of this accounting device. But you never
knowâ€”investors may cast a more wary eye on this practice in the future.
cash flow from operating activities, or cash flow from profit
This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilitiesâ€”and depreciation
expense is added back (as well as any other noncash outlay
expense)â€”to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.
Calculated to assess the short-term solvency, or debt-paying
ability of a business, it equals total current assets divided by total current
liabilities. Some businesses remain solvent with a relatively low current
ratio; others could be in trouble with an apparently good current ratio.
The general rule is that the current ratio should be 2:1 or higher, but
please take this with a grain of salt, because current ratios vary widely
from industry to industry.
A widely used financial statement ratio to assess the
overall debt load of a business and its capital structure, it equals total liabilities
divided by total ownersâ€™ equity. Both numbers for this ratio are
taken from a businessâ€™s latest balance sheet. There is no standard, or
generally agreed on, maximum ratio, such as 1:1 or 2:1. Every industry
is different in this regard. Some businesses, such as financial institutions,
have very high debt-to-equity ratios. In contrast, many businesses
use very little debt relative to their ownersâ€™ equity.
Generally refers to the book value of ownersâ€™ equity as reported
in a businessâ€™s balance sheet. If liabilities are subtracted from assets, the
accounting equation becomes: assets - liabilities = ownersâ€™ equity. In this
version of the accounting equation, ownersâ€™ equity equals net worth, or
the amount of assets after deducting the liabilities of the business.
A relatively small percent increase or decrease in
sales volume that causes a much larger percent increase or decrease in
profit because fixed expenses do not change with small changes in sales
volume. Sales volume changes have a lever effect on profit. This effect
should be called sales volume leverage, but in practice it is called operating
The short-term liabilities generated by the operating
(profit-making) activities of a business. Most businesses have three types
of operating liabilities: accounts payable from inventory purchases and
from incurring expenses, accrued expenses payable for unpaid expenses,
and income tax payable. These short-term liabilities of a business are
non-interest-bearing, although if not paid on time a business may be
assessed a late-payment penalty that is in the nature of an interest
Refers to the ability of a business to pay its liabilities on time
when they come due for payment. A business may be insolvent, which
means that it is not able to pay its liabilities and debts on time. The current
ratio and acid test ratio are used to evaluate the short-term solvency
prospects of a business.
A measure of the ability of a company to use its current assets to
pay its current liabilities. It is calculated by dividing the total current
assets by the total current liabilities.
A measure of how easily a company can use its most liquid current
assets to meet its current liabilities. It is calculated by subtracting
the book value of the inventories from the total book value of
current assets and dividing the result by the total book value of
current liabilities. Also known as acid-test ratio.
total current assets minus total current liabilities
A report that summarizes all assets, liabilities, and equity for a company
for a given point in time.
This is typically the accounts payable, short-term notes payable, and
accrued expense accounts on the balance sheet, or any other liabilities that are
expected to be liquidated within a short time interval.
The difference between the total of all recorded assets and liabilities on the balance
The process of selling off all the assets of a business entity, settling its liabilities,
and closing it down as a legal entity.
The amount of a companyâ€™s current assets minus its current liabilities;
it is considered to be a prime measure of its level of liquidity.
Financial statement that shows the value of the
firmâ€™s assets and liabilities at a particular time.
Net worth of the firmâ€™s assets or liabilities according
to the balance sheet.
Business owned by stockholders who are not personally
liable for the businessâ€™s liabilities.
market-value balance sheet
Financial statement that uses the market value of all assets and liabilities.
Combination of two firms into one, with the acquirer assuming assets and liabilities of the target firm.
net working capital
Current assets minus current liabilities.
Business owned by two or more persons who are personally responsible for all its liabilities.
A form used to report federal unemployment tax remittances and liabilities.
A wholesale write-down of assets and accrual of liabilities in an effort to make the
balance sheet particularly conservative so that there will be fewer expenses to serve as a drag on future earnings.
A special, nonrecurring charge taken in conjunction with a consolidation
or relocation of operations, or the disposition or abandonment of operations or productive
assets. Such charges may include impairment losses as well as other expenses, such as writedowns
of other assets including accounts receivable and inventory, and accruals of liabilities for
so-called exit costs, including such expenses as lease terminations, closure costs, severance pay,
benefits, and retraining.
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