How to Calculate Liabilities: A Step-By-Step Guide for Small Businesses
To calculate total liabilities in accounting, you must list all your liabilities and add them together. Liabilities are a company’s debts.
Accounting software makes this easy. It produces a financial statement called a balance sheet that lists and adds up all liabilities for you, according to the Houston Chronicle.
That said, you should still check your work by using the basic accounting formula.
In this article, we’ll guide you through each steps required to calculate liabilities. Calculating liabilities helps a small business figure out its total debt. You can also plug it into the basic accounting formula to make sure your books are correct.
Confused about what a liability is? This article has a simple definition and examples relevant to small businesses.
In this article, we’ll cover:
- List Your Liabilities
- Make a Balance Sheet
- Add up Your Liabilities
- Check the Basic Accounting Formula
1. List Your Liabilities
To calculate liabilities, first you need to know what liabilities you have.
- Accounts payable (money you owe to suppliers)
- Salaries payable
- Wages payable
- Interest payable
- Income tax payable
- Sales tax payable
- Customer deposits or retainers
- Debt payable (on business loans)
- Contracts you can’t cancel without penalty
- Lease agreement
- Insurance payable
- Benefits payable
- Taxes on investments
- Accrued liabilities (like interest owing that you haven’t been invoiced for yet)
Expenses Are Not Liabilities
Expenses are not liabilities. Expenses are continuing payments for services or things of no financial value. Buying a business cell phone is an expense. Liabilities are loans used to purchase assets (items of financial value), like equipment, according to The Balance.
2. Make a Balance Sheet
It’s possible to create a simple balance sheet in Excel. The below example shows a simple balance sheet created in Excel:
Source: Excel University
To make your own balance sheet, review the above liability types and include the ones that are relevant to your business.
Then plug in the amount owing for each liability type. Only include the amount owing for the accounting period you’re reviewing— the past financial year, quarter or month.
It’s easier and generally more accurate to use accounting software to produce a balance sheet. The below example is a basic balance sheet made using FreshBooks:
Some liabilities may be generated automatically. You may have already entered in the books a supplier’s invoice you haven’t paid yet or credit card debt. These will automatically appear on your balance sheet.
In the above example, supplier invoices not paid yet are totaled up in the category “accounts payable.”
There will be other liabilities you need to enter yourself. In FreshBooks, you can add or remove liabilities.
Consider adding the following liabilities to your balance sheet:
- Accounts Payable: Money you owe that’s not for a bank loan. For example, unpaid invoices for a service, such as your cell phone bill. Or an invoice from a supplier, such as materials for your jewelry business.
- Taxes Payable: Taxes owed to the government such as sales, employment or income tax.
- Current Loans Payable: Loans you must pay back within the next year.
- Long-Term Loans Payable: Loans you must pay back after a year or more.
- Credit Cards Payable: The balance of your unpaid credit card debt.
3. Add up Your Liabilities
Accounting software will automatically add up all your liabilities for you.
Otherwise, you will need to manually add your liabilities up in whatever software you chose, such as Excel.
- For example, a small pet store owes $500 in accounts payable for its utility bills, phone and internet bills and more. Its mortgage is $2000 a month and it has credit card debt of $5000. It took out a $10,000 business loan a couple years ago to renovate its space and it still owes $2000 on the balance. Finally, the owner owes the government $1000 in sales and income tax.
- $500 + $2000 + $5000 + $2000 + $1000 = $10,500 total liabilities
4. Check the Basic Accounting Formula
In double-entry bookkeeping, there is an accounting formula used to check if your books are correct. The formula is:
Liabilities + Equity = Assets
Equity is the value of a company’s assets minus any debts owing. An asset is an item of financial value, like cash or real estate.
In a nutshell, your total liabilities plus total equity must be the same number as total assets. If both sides of the equation are the same, then your books “balance” and are said to be correct.
So, a small business can use this formula to double check whether they calculated their liabilities correctly.
That said, if the equation doesn’t work, you’ll need to double check your equity and assets as well to figure out what account is wrong.
If you already know your total equity and assets, you can also use this information to calculate liabilities:
Assets – Equity = Liabilities
A balance sheet generated by accounting software makes it easy to see if everything balances.
In the below example, assets equal $18,724.26 and assets plus liabilities also equal $18,724.26. Total liabilities must be correct because the equation balances.
If you’re using Excel, plug in your assets and equity and make sure the equation works.
For more information on balance sheets and how to read and use them, read this article.
People also ask:
How to Calculate Total Liabilities
Total liabilities simply means the sum of all the money a business owes to its creditors. There are many types of liabilities but they fall under two categories in a company’s balance sheet: current (or short-term) liabilities and long-term liabilities, according to the Houston Chronicle.
Review the types of liabilities listed in the above section and then add up all the ones that apply to your business to calculate total liabilities.
How to Calculate Current Liabilities
To calculate current liabilities, you need to add together all the money you owe lenders within the next year (within 12 months or less).
Current liabilities include current payments on long-term loans (like mortgages), client deposits, interest payable, salaries and wages payable and funds owing to suppliers like your utilities bills.
Find the amount owing for each according to the accounting period you’re looking at—it could be this month, quarter or year.
- For example, to calculate current liabilities for September, include your mortgage payment for September and any other money owing for that month only.
Now add together all the amounts owing for the reporting period to find total current liabilities.
How to Calculate Total Debt
Calculate your small business’s total debt by using the following steps, according to the Houston Chronicle:
- Find your business’s liabilities. The section above lists common liabilities.
- Insert all your liabilities in your balance sheet under the categories “short-term liabilities” (due in a year or less) or “long-term liabilities” (due in more than a year).
- Add together all your liabilities, both short and long term, to find your total liabilities.
- Your total liabilities is the total debt your company owes.