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9 Min. Read

How to Calculate Liabilities: A Step-By-Step Guide for Small Businesses

How to Calculate Liabilities: A Step-By-Step Guide for Small Businesses

The total liabilities are the combined debts that a business must pay to any outside parties. This can include debts like loans, future buyouts, salaries to your employees, and more

You need to understand what total liabilities are and how they affect your balance sheet if you’re an accountant or business owner. Total liabilities can be thought of as the broad economic obligations of an organization.

The higher the total liabilities, the more money the company needs to make to pay off its debts and make a profit.

Accountants and business owners can calculate their total liabilities quite simply. To do this, you must list all your liabilities and add them together.

Accounting software makes this easy. Software like FreshBooks produces a financial statement called a balance sheet. This lists and adds up all liabilities for you.

That said, you should still check your work by using the basic accounting formula.

In this guide, we’ll guide you through each step 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.

Still 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

How to Calculate Total Liabilities

How to Calculate Current Liabilities

How to Calculate Total Debt

Key Takeaways

NOTE: FreshBooks Support team members are not certified income tax or accounting professionals. They cannot provide advice in these areas, outside of supporting questions about FreshBooks. If you need income tax advice please contact an accountant in your area.

1. List Your Liabilities

To calculate liabilities, first you need to know what liabilities you have.

According to the Houston Chronicle and Accounting Tools, these are some common liabilities:

  • 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 that you haven’t been invoiced for yet)

Liabilities can further be classified into several distinct types.

Short-Term Liabilities

All short-term liabilities, also called current liabilities, are debts or obligations due within a year or less. These include accounts payable, rent, payroll expenses, and more. Investors are interest in these since they may want to know whether a company has enough cash coming in to pay for these expenses.

Long-Term Liabilities

Long-term liabilities are debts and obligations due after one year from the current date. These can include loans, deferred tax liabilities, pension obligations, and more.

Companies don’t need as much liquidity to pay for long-term liabilities. They can always make more money in the future to pay them off. However, investors may still want to see that a company has enough cash flow potential to pay for long-term liabilities eventually.

Other Liability Types

“Other” liabilities are any unusual debt obligations a company may have. These are typically minor, like sales taxes or intercompany borrowings. Still, accountants and investors may investigate these to ensure that a company is financially healthy.

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:

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 of 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 book’s “balance” is correct.

A small business can use this formula to check whether they accurately calculated their liabilities.

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, the assets equal $18,724.26. 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 mean the sum of all the money a business owes to its creditors. Investors or creditors may want to look into total liabilities to determine if a company is financially healthy or a good investment.

To calculate total liabilities, check the list of liabilities in the above section. Then add up all the ones that apply to your business to calculate total liabilities.

For example, you may wish to combine:

  • Payroll expenses
  • Inventory costs
  • Costs for rent or building mortgages
  • Loans
  • Pension expenses
  • And more

Once you at all those up, you’ll have the total liabilities or debt obligation for your company. Investors sometimes examine the total liabilities of the company. They compare them against similar companies in the same industry. This way, they can tell whether the company in question is handling its finances responsibly.

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) and client deposits. They can also include interest payable, salaries and wages payable, and funds owed to suppliers like your utility 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, say you need to calculate current liabilities for September. To do this, 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 certain categories. These are “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 are the total debt your company owes.

Key Takeaways

A business’s total liabilities are all of its debts or financial obligations. It’s important to know how to calculate total liabilities so you can determine the net worth of the company. Total liability calculation also allows you to determine how much money a business needs to bring in to be profitable.

Interesting in learning more about financial topics or accounting practices? FreshBooks’ resource hub is a great place to start. Check it out here!


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