Balance Sheet Liabilities and Leases

Liabilities in a balance sheet are defined as current and long term. In the case of leasing liabilities they may be treated as being contingent.

Defining the Status of Liabilities

Debt in the balance sheet is separated into current and long term liabilities. Current liabilities are those that are payable within twelve month; long term liabilities beyond twelve months.

When using Figurewizard to create forecasts there is no requirement to allocate debt into net payable, short and long term liabilities because as with everything else our system performs and applies all of these the calculations automatically.

Current and Long Term Liabilities

A typical example of a long term liability arises when a fixed asset is acquired, which has been financed in part by a loan using a hire purchase or other installment plan. Assuming a loan of £3,500, repayable over 36 months, current and long term liabilities are calculated as follows:

Original Debt £3,500
Paid off During the Year £1,000
Balnce C/Fwd £2,500
Payable Within 12 months (Current Liability) £1,000
Payable After 12 months (Long Term Liability) £1.500

 

Current Liabilities and Working Capital

Current assets less current liabilities returns net current assets. This is commonly known as Working Capital and is important as it describes liquidity.

It is important to bear in mind the fact that while the values of fixed assets do not contribute to liquidity, any repayments in respect of their financing will be a charge to it and therefore to forecast cash flow over the course of the year or years ahead. It is always a good idea to check on the effects of any investment in fixed assets on forecast liquidity and cash flow before entering into any commitment. Financing the investment does not amount to a free lunch.

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