Any company or business must have working capital in order to maintain operations. In order to determine a working capital, current assets are subtracted from current liabilities. This indicates the financial strength of a company as it outlines whether or not a company has enough cash or assets to pay for liabilities. Liabilities are defined as the legal obligations or financial debts of a company that develop throughout course of business operations (Kimmel, Weygandt, & Kieso, 2019). Some examples of liabilities include short/long term borrowing from individuals, banks, or entities. Additionally, there are various types of liabilities such as current liabilities and long-term liabilities. Current liabilities are payable within one operating cycle/one year and are written on the balance sheet in the order that payments are due. A few examples of current liabilities are wages and salaries, notes payable, accounts payable (revenue owed to vendors), and deferred revenues (goods that were paid for but not yet delivered) (Kimmel, Weygandt, & Kieso, 2019). In contrast, long-term liabilities are payable beyond one operating cycle/one year and are written in separate formal documents that are inclusive of important details of transactions (e.g. interest, principal amount, and due date). Bonds payable, mortgages, leases, pension obligations, bank notes, and bank loans are all examples of long-term liabilities.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2019). Financial accounting: Tools for business decision making (8th ed.). Retrieved from https://www.vitalsource.com
Liabilities are creditors’ claims on total assets and as existing debt per Kimmel (2011). Liabilities are debt a company settles by transferring assets or services. In determining the differences between current liabilities and long term liabilities, future maturity dates are very important. A debt that is expected to be paid by existing current assets or creation of other current liabilities within one year or operating cycle is a current liability. Long term liabilities are debts that will not meet the two proceeding criteria (Kimmel 2011).
Major types of current liabilities are: account payable, accounts payable, accrued liabilities, and unearned revenues. Accrued liabilities can be things such as taxes, salaries, wages, and interest. Many notes payable have future payoff date beyond a year cycle if operation does not make payable long term liabilities. Taking a very close look went in a company would be ideal to notice the differences. I would love to be advice about future decision concerning investments. A company with less long term liabilities is ideal for me, and ability to save after current liabilities are paid off.
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