Definition of Liabilities and Benefits for the Company

Definition of Liabilities and Benefits for the Company – In the business world, one thing and another usually has a relationship with one another. One of them is assets and liabilities that have a high relationship to the smooth process of a business journey. In conducting business activities, a company will definitely need assets.

While the liability is a risk that should be taken by the company to develop the business that is being run. Even so, liabilities do not only exist in the form of debt or borrowed money. There are various forms of liability that  needs to know about. Instead of just guessing and speculating,  should read this article to the end to find out the form of liability in detail.

Definition of Liability

Definition of Liabilities and Benefits for the Company

A liability is an obligation that must be paid by a company to the party concerned by issuing a number of funds or economic resources of the company. Generally, companies will take on liabilities to support all operational activities in their business.

That way, the expansion and development of a company can be done in a relatively faster time. If the company insists not to take a risk by way of debt. Especially for companies that do not have large amounts of assets. So the development of the company has the potential to be hampered and not optimal.

As for another meaning of a simpler liability, namely an obligation that is calculated equal to the value of money and must be paid by the company to the party concerned. The parties referred to here can be companies, individuals, cooperatives, banks, and other financial institutions. In essence, if according to the accounting records, a liability is a debt. Where in the accounting equation, liabilities are abbreviated ALE by accountants.

The abbreviation stands for, Assets Liability, and Equity. These three things are related to each other. From this, an equation regarding accounting emerges which shows that assets come from the sum of liabilities and also equity. Why does a company have a liability? It relates to the number of assets owned by a company.

If all companies have assets that are not much. So it is advisable to take a liability. The purpose of this is as an effort so that the company can develop optimally. Because, when surviving with minimal assets, the company will automatically find it very difficult to progress or develop.  needs to know that liabilities are not only in the form of money. But it can also be in the form of services, goods, or other forms of economic benefit. In addition, liability can also come from various types of transactions. For example, from the exchange of assets, business relationships, and various transactions that can provide benefits to the company’s economy in the future.

In financial accounting, a liability is considered as an entity obligation that arises from a transaction or event in the past. The said obligations are explained through the following characteristics:

1. Liabilities are all types of debts or loans from banks or individuals aimed at increasing the company’s income.

2. In addition, a liability is a responsibility of another party that requires settlement through the delivery of assets in the form of providing services or other transactions in the future and generating an economic benefit.

3. Obligations are duties and responsibilities of related parties, either leaving little or no policy in order to avoid settlement.

4. Finally, a liability is an event and transaction that has occurred and gives rise to the entity’s liability.

Difference between Liabilities and Expenses

Liabilities and expenses are often categorized as the same thing. But actually the two are very different. Liabilities are usually in the form of debt used by companies to obtain assets for operational needs. For example, if the company buys the tools for production that are used in the manufacture of products. Then the payment is made using a loan, then the transaction is classified as a liability.

As for expenses, which include ongoing payments for things that have no real value and are used to earn profit or income. One example that can be used as an illustration is the costs incurred to pay for advertising with the aim of attracting customers. In addition, expenses and liabilities are generally listed in different places in the financial statements. Where liabilities are usually written on the balance sheet, while expenses are written on the income statement.

Types of Liabilities

In general, liabilities will appear and are recorded on the balance sheet of financial statements written at the end of the period. The goal is to identify the financial condition of a company in that period. Usually, the location of the liabilities in the financial statements is in the right column along with the equity notes. Where in the recording, the liabilities are in the order that has been determined. The following are 2 types of liabilities that  needs to know about in the financial statements of a company or business. Listen until it’s finished.

1. Long Term Liability

The first type of liability is long-term liabilities. That means, the period specified for the payment of these obligations is expected to last for more than one year. Examples of long-term liabilities are debt in the form of mortgages, bonds payable and cash loans.

2. Short Term Liability

The second type of liability is short-term liabilities. Liabilities of this type are often referred to as current liabilities. This can be interpreted as an obligation that is expected to be completed in a short period of time or no more than a year. The following are some examples of short-term liabilities:

1. Sales Tax Liability

Sales tax liability is also included in the payable or liability. Where it is the accumulation of sales tax that can be obtained from consumers and held until maturity before being paid to taxation.

2. Income Tax Liability

Of course we know that there are some companies that deduct the salaries of their employees to be used as income tax. These deductions will usually be collected and kept until they are deposited into state taxation.

3. Mortgage and Fund Loans

If previously the two debts were included as examples of long-term liabilities, now they are already present as examples of types of short-term liabilities. This can happen if the payment is made in monthly installments. Thus, payments under 12 months will be categorized as short-term liabilities.

Apart from the 2 types of liabilities mentioned above, there are actually other types, namely capital. Capital is a type of liability that comes from the difference between assets and debt owned by a company. Capital is also included in the type of contingent liability. That means, whether there is an obligation or not depends on events that will occur in the future. Therefore, the maturity of a liability of this type can never be predicted. So it’s not surprising that not many company owners take this type of liability. For example, these types of liabilities include, guarantees for a product, lawsuits through legal channels, and others.

Liability Characteristics Are

For  who have been in business for a long time or who have just started a business, of course, they will be very familiar with the term liability. This is because of the characteristics it has. Here are some characteristics of liabilities that need to be understood:

1. All loans used to increase personal or corporate income, whether from banks, individuals, or others, must be paid immediately when they are due.

2. All kinds of obligations that must be paid to other parties, whether it is the exchange of assets, cash transfers, the provision of services or services, and other activities that provide economic benefits in a predetermined period in accordance with the agreement or the time of certain business events.

3. Business events or transactions that have been carried out and require the entity.

4. A form of entity’s responsibility to other parties, whether it is abandoning a policy or not avoiding settlement efforts.

How to Analyze Business Liabilities

The existence of a liability report in a company can also be used as an indicator of the company’s financial health. Therefore, writing and recording must be done in detail and detail, neat, and structured. The following are two ways that can be used to analyze liabilities in a company:

1. Through the ratio of debt to assets owned by a company

When uses this method, the thing that needs to be ascertained is how many assets the company has that can be used to meet and cover the obligation or liability. We can calculate using the percentage of all debt amounts and make sure that the total or the amount is less than 50%. If the total of all debts owned can be closed by using the total business assets owned by a company. So most likely the company can still operate.

2. Using Debt To Equity Ratio

The second way is by using a debt-to-equity ratio. Here we have to calculate the total of debt with equity owned by the company. Make sure that the return on the debt-to-equity ratio is no more than 50%. However, if the reality is more than 50%, then that is when the company must reduce the amount of obligations or debts it has. So, liability is not something bad for a company or business. There are times when it becomes one of the ways to achieve success.

The thing that needs to be understood is to keep control of the amount of the liability so that it does not exceed the company’s ability to pay it. Because, the main purpose of using liabilities is to be able to develop a company or business, not to make it bankrupt because of too much debt.

Therefore, keep neat, detailed, and structured records for all liabilities held. With these records, we can monitor and pay attention to the business position and also the company’s financial condition. In addition, liabilities can also give us the opportunity to develop our business to the fullest. However, we must ensure that the company can pay these obligations on time. So that when we need more liabilities, it will be easier to get them.

Liability Example

So that  has a clear picture of what a liability is. The following is an example of a liability case in a company:

Let’s just say, Andi is an employee at PT Maju Jaya. In May 2021, he received a salary of Rp. 7,000,000, then child support of Rp. 800,000, and allowance for transportation of Rp. 1,500,000. Not only that, to maintain Andi’s welfare, PT Maju Jaya also has to pay accident insurance in the amount of Rp. 250,000, death insurance of Rp. 100,000, and also an old age allowance of Rp. 300,000. So that the gross salary that will be received by Andi is Rp. 9.950.000.

After that, Andi’s salary was deducted by Rp. 400,000 to be used as a pension fund, Rp. 200,000 for zakat purposes, Rp. 2,500,000 to pay the house installments to the bank, and Rp. 425,000 PPh 21. That way, the net salary that Andi will get in May 2021 is Rp. 6,425,000.

From the analysis above, the obligation that must be given to Andi and applies as long as Andi is still working at PT Maju Jaya is Rp. 9.950.000.

From the explanation above, we can conclude that liability is one of the things that can be used or used by a company to develop their company to the maximum. Company owners who insist on not taking on liabilities can potentially hamper the growth and development of their own company and become sub-optimal.

However, it should be understood that liabilities are different from expenses as described above. Where liabilities are usually used to acquire assets to meet operational needs. While expenses are usually used for things that have no real value but have the potential to increase revenue.

From the explanation above, there are 3 types of liabilities which are categorized based on the period of payment. The first is Short-Term Liabilities with maturities of less than one year. The second is Long-Term Liabilities with maturities of more than one year. The third is Contingent Liabilities, these are extraordinary debts that are carried out under special conditions.

The calculation of liabilities using the ratio of debt to assets and to equity can make the company feel overwhelmed if it is done manually. Especially if the company takes on many types of liabilities. To minimize errors, the company requires a special application to support online disability.

Well, that’s an explanation of what a liability is in a company and what are the benefits for business development. For  who are struggling in the business field, the explanation above will certainly be very helpful in understanding various ways to make companies and businesses more advanced.

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