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What are Liabilities On My Company’s Financial Statements?

May 26, 2015

Tax Question:

What are liabilities on my company’s financial statements?

Facts:

Liabilities are comprised of the money and debts your corporation owes or, depending on certain circumstances, might owe to creditors such as suppliers, lenders and government agencies.

Discussion:

Liabilities can be classified as either current or long-term and they generally have credit balances. Current liabilities are obligations that are expected to be payable within one year. Some examples of current liabilities are accounts payable, wages payable and sales taxes such as GST. The current portion of a long-term loan – principal balance payable in 12 months – may also be classified as a current liability.

  • Current liabilities also include amounts received in advance for future services. There may be instances when deposits are received in advance but the work is not performed until after the current period has ended. The deposits will then be recorded as unearned revenue or customer deposits and thus reported as a liability. In the next accounting period, the deposits would then be applied against invoices which will be reported as revenue.
  • Long-term liabilities are obligations that are expected to be payable in a period that is longer than one year. Some examples of long-term liabilities are loans, mortgages and capital leases. The principal balance of the loan or mortgage payable at a specific date in time will be reported on the Balance Sheet and the interest is recorded as an operating expense on the Income Statement. Commercial mortgages and loans may have covenants attached that require the corporation to fulfill certain conditions such as having reviewed or audited financial statements prepared before a set deadline or meeting defined ratios such as debt to equity or interest coverage.
  • A capital lease is recorded as a long-term liability if the lease is considered a purchased asset for accounting purposes. There are certain criteria that allow you to record the lease as a capital lease such as if the lease contains a purchase agreement for less than the market value of the equipment or the lessee gains ownership of at the end of the lease period. Operating leases are considered rentals for accounting purposes and are recorded as an expense on the Income Statement.
  • Contingent liabilities are often disclosed in the notes of the financial statements as their existence depends on the outcome of a future event such as a lawsuit. The contingent liability may be recorded on the Balance Sheet when the future outcome is probable and it can be reasonably estimated along with the contingent loss being reported on the Income Statement. Other examples of contingent liabilities include a warranty of a company’s products and guarantees of a third-party loan.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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