What are Total Liabilities
Total liabilities refer to the aggregate of all debts for which an individual or company is liable. 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 maturity beyond the one year point. Liabilities such as loans, leases and taxes due can fall into either category. Total liabilities are calculated by summing all short-term and long-term liabilities, along with any off balance sheet liabilities that corporations may incur.
BREAKING DOWN Total Liabilities
Total liabilities are always displayed on the balance sheet and represent the total debt of an entity. On the balance sheet, total liabilities plus equity must equal total assets. 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 (GAAP) 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 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 show how assets are financed.
Nature of Debt Financing
A larger amount of total liabilities is not in-and-of-itself 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. However, the total liabilities of a business have a direct relationship with the creditworthiness of an entity. In general, if a company has relatively low total liabilities, it may gain favorable interest rates on any new debt it undertakes from lenders, as lower total liabilities lessen the chance of default risk.