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The piper has come to town and he sits squaring in the liability section of your balance sheet. He waits for payments and the day he can leave town.
Liabilities are the amounts owed. This can encompass your light bill to a partner buyout.
Ultimately, the less liabilities, the better, but liabilities aren’t all bad. They make sense when lower interest rates are available. In this scenario, financing frees up cash during asset acquisitions.
Ultimately, it’s all about keeping the piper under control, because he can sneer and make us lose sleep at night if left unattended.
Assets are arranged by liquidity as we talked about in the prior post. Liabilities, on the other hand, are listed based on payback period. Liabilities are merely balances. They do not describe the type of expense. The balance in a liability account is akin to the payoff balance on your car not the car itself.
Below is an ordered listing:
Current Liabilities - expect to pay these within 30 days or so.
Long Term Liabilities - loans with a longer payback period listed shortest to longest.
These categories are subtotaled and added together. The final amount will ultimately be added to equity.
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