# Define total liabilities. How do you calculate them and what do they tell?

A

Total liabilities are the aggregate of all obligations of the enterprise. Total liabilities reflect the sources of education of all available means of the company. Thus, assets can be called the property of the company, and liabilities are indicated by the monetary funds, due to which this property was formed.

## Explanation:

Total liabilities are divided into current and long-term liabilities of the company. Current liabilities, similar to current assets, exist only within one production cycle. In the balance sheet they are listed higher than long-term liabilities. Long-term liabilities of the company include debt that is not payable in the current year, that is, existing longer than one production cycle. The difference between the total amount of assets and liabilities is the equity of the owner of the company. This value shows how much capital the owner will have if the company sells all the assets and uses the money to pay off its debts. Assets and liabilities of the company should always be in balance. These indicators are displayed in the balance sheet of the company, which is compiled for each specific reporting period.

Total liabilities consist of two main parts, which are liabilities such as short-term and long-term, and equity. The first part reflects the authorized capital or par value of shares, additional capital or the result of the revaluation of fixed assets, retained earnings of previous years and the reporting period. Long-term liabilities include bank loans and loans payable more than one year after the reporting date. The second part reflects short-term liabilities which include borrowed funds and accounts payable. Including allocated to suppliers for wages, social insurance and security, and before the budget.

In the balance sheet, assets and liabilities are shown only in cost terms. Each element of an asset and liability is called a balance sheet item. Any article of the liabilities side of the balance sheet allows to obtain the following characteristics of the sources of formation of economic resources. Due to what source is this part of the assets created, for what purpose are they intended, their value. All articles of the total liabilities as well as the asset, balance, based on their economic homogeneity, are summarized in certain sections of the balance sheet. The information provided in the balance sheet liability allows people to determine what changes have occurred in the structure of equity and borrowed capital, how many long-term and short-term borrowed funds are involved in the company’s turnover. Therefore, total liabilities show where the funds came from, to whom the company owes them.

Total liabilities are calculated by summating all of the liabilities of the company and by subtracting shareholder’s equity from total assets. The financial condition of the enterprise largely depends on what means it has at its disposal and where they are invested. By degree of ownership, the capital used is divided into equity and borrowed. The amount of equity is of particular importance for organizations in the analysis of their financial condition, which characterizes financial independence and economic independence. The presence of the organization’s own capital, the value of which has a steady upward trend, means for potential lenders, investors, lenders and shareholders additional guarantees in market conditions. For the organizations themselves, equity is the main source of their statutory activities, covering possible losses, creating new types of property and expanding the scope of activities. The equity of trading organizations structurally consists of such sources as authorized capital, reserve capital, retained earnings of previous years and the reporting year. The equity of trading organizations should include the amount of depreciation for non-current assets. They are accumulated by the organization in order to carry out reconstruction, modernization, replacement or acquisition of new objects of non-current assets.

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Academic.Tips. (2020) 'Define total liabilities. How do you calculate them and what do they tell'. 3 June.

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Academic.Tips. 2020. "Define total liabilities. How do you calculate them and what do they tell?" June 3, 2020. https://academic.tips/question/total-liabilities/.

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