Classification of Liabilities on Balance Sheet
A liability is an obligation for a company or an individual to settle a debt, avoiding which could lead to legal action. There are two types of liabilities, Current and long term liability that are organized in a balance sheet.
The liabilities that can be settled within a normal operation cycle of a business are known as the current liabilities. Most of the current liabilities should be settled within a year's time using the current assets. Since all the current liabilities will be because of the purchase of a product or service that is recorded under accounts payable. The liabilities that are due to acquiring machinery, property for the business operations are also considered as current liabilities.
Even the income tax, property taxes, salaries, telephone bills are also comes under this category. A long term liability that will be paid within an operational cycle is also termed as a current liability.
The liability that cannot be settled within a year of the balance sheet date is known a long term liability. Long term liability includes loans, bonds, notes, mortgages that will exceed one year for payment. In a balance sheet these liabilities are shown on the right considered as capital assets.
So the assets and liabilities form the major part of a balance sheet to know the liquidity of a business. The right balance between these two make a business more profitable. If the liabilities are very less than the assets a company owns, it is considered a profit making company.