Liabilities

Liabilities are the business's debts. Just like assets, there are two types of liabilities--current liabilities and long-term liabilities. Liabilities should be arranged on the balance sheet in order of how soon they must be repaid. For example, accounts payable will be listed first because they generally must be paid within thirty days, while notes payable are usually due within ninety days to a year, loans may be due over many months or years, and mortgages may extend as long as thirty years.

Current liabilities include accounts payable, notes payable, accrued expenses such as wages and salaries, taxes payable, and the portion of long-term debts due within one year from the date of the balance sheet.

• Accounts payable are amounts owed to creditors for services or goods the company has received but not yet paid for.

• Notes payable and loans are money due to lenders within the next year.

• Accrued expenses are payroll and payroll taxes which are due for the work done by employees but which have not yet been paid.

Long-term liabilities are any debts that must be repaid more than one year from the date of the balance sheet. They may include start-up financing or mortgages.

All liabilities are totaled in the line item "Total Liabilities. "

The Net Worth is calculated as:

Total Assets - Total Liabilities = Net Worth.

So, What Does It All Mean?

By looking at a balance sheet, a business owner can use several simple benchmarks to analyze the health of a business and help make good decisions in managing the company.

Working Capital

Working Capital = Total Current Assets - Total Current Liabilities.

Working capital simply shows whether a company is making or losing money, and is used by lenders to evaluate whether a company can survive hard times. It should always be a positive number. Loan agreements often specify how much working capital the borrower must maintain.

Current Ratio

Current Ratio = Total Current Assets/Total Current Liabilities.

The current ratio measures financial strength. The number of times current assets exceed current liabilities shows the company's solvency. It answers the question, "Does my business have enough current assets to meet the payment schedule of current liabilities with a margin of safety?"In general, a strong current ratio is two or more. Of course, this will depend on the type business and the type of the current assets and current liabilities. A very high current ratio might mean that cash on hand isn't being used efficiently. For example, it might be a good time to invest in updated equipment for greater productivity.

Quick Ratio

Quick Ratio = (Current Assets - Inventory)/Current Liabilities.

The quick ratio measures a company's liquidity by looking only at a company's most liquid assets and dividing them by current liabilities. It helps determine whether a business can meet its obligations in hard times. "Quick" assets are cash, stocks and bonds, and accounts receivable (i. e. , all current assets on the balance sheet except inventory). Quick ratios between. 50 and 1. 0 are usually considered satisfactory if receivables collection is not expected to slow.

Debt/Worth Ratio

Debt/Worth Ratio = Total Liabilities/Net Worth.

Debt/worth ratio indicates a company's solvency. It is a measure of how dependent a company is on borrowing rather than equity.