How to Calculate Liabilities for a Balance Sheet

A business liability is a financial obligation owed to another person or entity. These obligations represent a claim against the company’s assets. Liabilities are one of the three components of a balance sheet, which provides a snapshot of a company’s financial position.

The balance sheet is governed by the accounting equation: Assets = Liabilities + Equity. This formula shows that a company’s assets are financed by debt (liabilities) or owner and investor contributions (equity). Correctly calculating liabilities is necessary for an accurate balance sheet, used to assess a company’s financial health.

Required Financial Documentation

Before calculating liabilities, a business must gather all financial records to ensure no obligation is overlooked. These source documents provide evidence and details of the amounts owed. You will need to collect the following:

• Outstanding supplier and vendor invoices, which are the primary source for identifying accounts payable for goods and services received on credit.
• Loan agreements and their corresponding amortization schedules. These detail the terms for borrowed money and are needed to separate the loan’s current portion from the long-term balance.
• Payroll records, including earnings reports and tax information, to calculate wages and payroll taxes owed to employees and government agencies.
• Recent credit card and bank statements to identify any outstanding balances on lines of credit or company cards.
• Customer contracts and sales records to determine unearned revenue from advance customer payments.
• Copies of recent tax filings and any notices from tax authorities to find the figures for income taxes payable.

Calculating Current Liabilities

Current liabilities are a company’s financial obligations that are due for payment within one year or a single operating cycle. Calculating these short-term debts begins with accounts payable, determined by summing all unpaid invoices from suppliers.

Another category is accrued expenses, which are costs a company has incurred but has not yet paid. A common example is accrued wages, representing employee earnings for work performed in one accounting period but paid in the next. This is calculated by multiplying unpaid workdays by the daily payroll cost. Accrued interest on loans is calculated by applying the interest rate to the outstanding loan principal for the time passed since the last payment.

Short-term notes payable represent the portion of a loan’s principal that must be paid within the next 12 months. The loan’s amortization schedule will show the principal portion of each of the next 12 monthly payments, and the sum of these amounts constitutes the current portion of the loan.

Unearned revenue is a liability for payments received from customers for products or services not yet delivered. For example, if a company receives an annual software subscription fee upfront, it recognizes the payment as a liability. As each month of service is provided, one-twelfth of that revenue is moved from the liability account to the revenue account on the income statement. Taxes payable, including income, sales, and payroll taxes, are current liabilities until remitted to the government.

Calculating Long-Term Liabilities

Long-term liabilities are financial obligations due more than one year from the balance sheet date. The most common type is the non-current portion of a loan. After calculating the current portion of the principal due in the next 12 months using the amortization schedule, the remaining principal balance is the long-term liability.

Bonds payable are another form of long-term debt. When a company issues bonds to raise capital, it borrows money from investors and promises to repay the face value of the bonds at a future maturity date. The face value of the bonds sold is the long-term liability recorded on the balance sheet until the bonds are repaid.

A deferred tax liability can arise from timing differences between how a company reports income for accounting versus tax purposes. For instance, using an accelerated depreciation method for tax filings while using a straight-line method for financial statements creates an obligation to pay more tax in the future. This future obligation is recorded as a deferred tax liability.

Aggregating Total Liabilities for the Balance Sheet

Once all individual liability amounts have been calculated, the final step is to aggregate them for the balance sheet. First, sum all short-term obligations, including accounts payable, accrued expenses, the current portion of loans, unearned revenue, and taxes payable. This sum results in a subtotal labeled “Total Current Liabilities.”

Next, all long-term obligations are added together. This calculation combines the non-current portions of loans, bonds payable, and any deferred tax liabilities to create a subtotal for “Total Long-Term Liabilities.” The sum of Total Current Liabilities and Total Long-Term Liabilities provides the “Total Liabilities” figure.

On the balance sheet, liabilities are presented in their own section. This section is organized with current liabilities listed first, followed by long-term liabilities, and concludes with the Total Liabilities line.