The Liabilities side of your Balance Sheet

Assets = Liabilities + Owners Equity. Assets – Liabilities = Owners Equity

The Liabilities side of your balance sheet has two parts: current liabilities and long-term liabilities.

Current liabilities are ones that have to be paid within twelve months. They include accounts payable, taxes payable, customer deposits, accrued expenses and short-term notes payable.

Customer deposits are a liability because the client gave you money that you deposited, but you didn’t deliver the goods or service yet. You “owe” them.

Accrued Expenses are expenses that you know you incurred in that period, but you didn’t get the bill for, or pay yet. For example, let’s say the month or year ends on a Thursday, and the pay week ends on a Friday. You have four days of payroll expense that was incurred in one month but will be paid in the next month. So you accrue four days’ worth of payroll under “accrued expenses.”

The idea is to line up the big expenses and the revenue that was billed in the correct month. You don’t have to accrue little expenses and you may not accrue expenses monthly, but just at year end, but the idea is to get it as close as possible when it counts.

Also under Current Liabilities, you have short-term notes payable. These are loans you have to pay back within twelve months, which may include credit cards and short-term credit lines.

More tomorrow!