Key Elements in Financial Analysis: Liabilities
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Right, today I will continue sharing about the key elements in financial analysis.
Previously, I have explained the first important element, which is assets.
For this series, I want to explain in detail the second element, which is liabilities.
What are Liabilities?
Liabilities, in simple terms, refer to debts or obligations.
They exist due to credit purchase transactions.
This means we receive goods, products or services first before making payment.
Key Terms in Liabilities
These terms may be new to some readers.
Let us break them down.
- Accounts payable (refund), trade payable (credit)
- Provisions or accrued liabilities
- Financial liabilities
- Current and deferred tax liabilities
- Unearned revenue (money already received, but revenue/sales have not been recorded yet)
Accounts Payable
This refers to a company''s business debt owed to sellers or suppliers for providing goods or services on credit.
It is a debt that needs to be paid within a short period and falls under current liabilities.
It may also include money refunded to customers.
Therefore, such amounts are included in accounts payable.
Provisions or Accrued Liabilities
According to Investopedia, accrued liabilities are expenses incurred by a business but not yet paid.
A company can accumulate liabilities for a number of obligations, and accrued liabilities are recorded as short-term or long-term liabilities on the company''s balance sheet.
Financial Liabilities
This refers to a company''s debt owed to certain financial institutions such as banks.
Current and Deferred Tax Liabilities
A deferred tax liability is a tax that has been assessed or is due for the current period but has not yet been paid, according to Investopedia.
For example, every month Company ABC pays tax of RM1,000 for a year, so the total tax paid annually is RM12,000.
However, when the company checks, it turns out they actually need to pay RM30,000. What happens is that Company ABC still owes the Inland Revenue Board (LHDN) another RM18,000.
That RM18,000 is known as a current and deferred tax liability.
Unearned Revenue
This situation occurs when Company ABC has already received money from customers but the product or service has not yet been delivered to the customers concerned.
What happens is that the sales or revenue have not been recorded yet.
Therefore, unearned revenue is classified under liabilities.
Frequently Asked Questions (FAQ)
1. What are liabilities in financial analysis?
Liabilities are obligations or debts that a company needs to pay. They are divided into two types: current liabilities (short-term debts) and non-current liabilities (long-term debts).
2. What is the difference between current liabilities and non-current liabilities?
Current liabilities are debts that need to be paid within less than a year, such as accounts payable and accrued expenses. Non-current liabilities are long-term debts exceeding one year, such as bank loans.
3. Why is it important to understand liabilities before investing in stocks?
Understanding liabilities helps investors assess a company''s financial health. A company with liabilities that are too high compared to its assets may be high-risk and less financially stable.
4. What is unearned revenue and why is it considered a liability?
Unearned revenue occurs when a company has received payment but the product or service has not yet been delivered to the customer. It is considered a liability because the company still owes the customer a product or service.
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