Yesterday, we started talking about the basic financial statement equation:
Assets = Liabilities + Owners/Shareholders Equity.
And, we all agreed that we weren’t going to run for the hills over a little equation! Right? Right!!
So, Assets are things we own that have value or usefulness. Assets MAKE you money. (Which we love!)
Today, we’re going to talk about Liabilities. Simply put, Liabilities are things you owe to other people/businesses. Like:
-Bills you need to pay. ( Accounts Payable: Rent, utilities, the bill for stuff you bought to sell, etc.)
-Taxes you need to send to Uncle Sam (Like sales taxes and payroll taxes).
-The Mortgage or car loan. (But not the building or car. Those would be Assets because they have value. Only what you owe on them is the liability. Make sense?)
Now, remember how I said accountants luuuuv to get a little OCD when they organize? Well, we’ve broken Liabilities down into two kinds:
1. CURRENT LIABILITIES: Bills/Taxes, etc, we owe that are going to be due in less than a year. This would be things like your monthly bills (Accounts Payable), Payroll you pay each week/two weeks/month, sales taxes due quarterly or monthly.
2. LONG-TERM LIABILITIES: Things you have to pay for over a long period of time, that is, over more than twelve months. Like the mortgage or the car loan.
And there you have it: Liabilities. Money you owe other people/businesses. Not so hard to understand, yes?
Tomorrow: Equity.
A little tiny smidge of a bit more complicated. But nothing we can’t handle!
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