Loading the player...

What are 'Total Liabilities'

Total liabilities refer to the aggregate of all debts an individual or company is liable for and can be easily calculated by summing all short-term and long-term liabilities, along with any off balance sheet liabilities that corporations may incur. On the balance sheet, total liabilities plus equity must equal total assets, and a company's total liabilities can be split up into three basic parts: short-term, long-term, and other liabilities. Short-term liabilities are typically liabilities that are due within one year or less, while long-term liabilities are those with a time horizon of maturity is past the one year point, although liabilities such as loans, leases and taxes due can fall into either category.

BREAKING DOWN 'Total Liabilities'

Total liabilities are always displayed on the balance sheet and represent the total debt of an entity. All assets of an entity are either owned by the entity and classified as equity or are subject to future obligations and are classified as a liability.

Usefulness of Total Liabilities

As a standalone figure, total liabilities is not useful. It is only useful in a contextual and comparative situation. For example, the total liabilities of an entity provide insight into the entity only upon comparing the figure to total assets, total equity or industry averages. An entity's total liabilities subject to generally accepted accounting principles will have a different comparative nature than an entity utilizing the cash method of accounting.

Examples of Liabilities

Short-term liabilities are typically accounts payable, salary payable and rent payable. Long-term liabilities include the portion of a mortgage or equipment loan payable in greater than one year. Other liabilities include deferred tax liabilities and bond sinking funds. The summation of all these liabilities results in total liabilities.

Use in Ratios and Leverage

Total liabilities is a useful metric for analyzing a company's operations. One example is in an entity's debt-to-equity ratio. This calculation compares the financing weight of the entity. A similar ratio called debt-to-assets compares total liabilities to total assets to see how assets are financed.

Nature of Debt Financing

Higher dollar amounts of total liabilities is not a financial indicator of poor economic quality of an entity. Based on prevailing interest rates available to the company, it may be most favorable for the business to acquire debt assets by incurring liabilities. The total liabilities of a business have a direct relationship with the creditworthiness of an entity. In general, the lower a company's total liabilities, the lower the interest rate to be charged on new liabilities due to the lower chance of default risk.

RELATED TERMS
  1. Long-Term Liabilities

    In accounting, a section of the balance sheet that lists obligations ...
  2. Other Current Liabilities

    Other current liabilities are obligations coming due in the next ...
  3. Balance Sheet

    A balance sheet reports a company's assets, liabilities and shareholders' ...
  4. Adjusted Liabilities

    Adjusted liabilities are used in the insurance industry to show ...
  5. Deferred Long-Term Liability Charges

    Deferred long-term liability charges are future liabilities, ...
  6. Business Liability Insurance

    Business liability insurance protects a company and/or business ...
Related Articles
  1. Personal Finance

    How To Improve Net Worth By Decreasing Liabilities

    Here's an analysis of how to adjust liabilities and assets to improve net worth.
  2. Investing

    How to Analyze a Company's Financial Position

    Find out how to calculate important ratios and compare them to market value.
  3. Investing

    Debt Ratios

    Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
  4. Small Business

    What is Unlimited Liability?

    Unlimited liability means that the owners of a business are liable for the entire amount of debt and obligations of that business.
  5. Investing

    Portfolio immunization versus cash flow matching

    Understand how portfolio immunization are compared to cash flow matching, when taking an asset-liability management (ALM) approach to investing portfolios.
  6. Investing

    Understanding The Federal Reserve Balance Sheet

    We are all connected to the Fed's balance sheet, and the currency notes that we hold are its liabilities.
  7. Personal Finance

    Common Liabilities That Hurt Your Net Worth

    Every penny that you keep out of the liability side of the net worth equation essentially ends up on the asset side.
  8. Investing

    Understanding Coca-Cola's Capital Structure (KO)

    Since the crisis of 2008 and the implementation of an accommodative monetary policy by the Fed, Coca-Cola's capital structure has significantly shifted.
  9. Insurance

    An Advisor's Guide to Prof. Liability Insurance

    A guide to what financial advisors need to know about professional liability insurance.
RELATED FAQS
  1. How are accounts payable listed on a company's balance sheet?

    Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >>
  2. How do I calculate current liabilities in Excel?

    Learn what current liabilities are and examples of a company's current liabilities, and find out how to calculate total current ... Read Answer >>
  3. How do you calculate working capital?

    The formula for calculating working capital is straightforward, but lends great insight into the short-term financial health ... Read Answer >>
  4. What is the difference between legal liability and public liability?

    Discover the differences between a general legal liability, a specific public liability and a professional indemnity in the ... Read Answer >>
  5. Do banks have working capital?

    Learn the reasons why banks do not have working capital due to the lack of typical current assets and liabilities accounts, ... Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center