(Money Matters) Liabilities: the untold story of debt - Kasfia Rashid

Kasfia Rashid - "Money Matters with Kash the Bookkeeper"

Introduction: 

Hello! Welcome to Money Matters here at IBGR, THE #1 global resource for businesses! My name is Kasfia Rashid, but you can call me Kash the bookkeeper! I help small business owners understand the language of business, Accounting!! 

“Money matters” is all about the fundamental basics of the accounting language. These building blocks of business can be arranged and rearranged for a customized experience. Once you understand the basics of any language it is much easier to communicate using that language. 

We have discussed Assets, what they are, how they are used and why they are important in the last two shows, the following two shows are all about the next part of the Balance Sheet, Liabilities. 

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Show Objectives - The Why

If assets are things that you own then liabilities are things you owe to someone in exchange for something. In this week's episode we are going to explore the various categories of liabilities (spoiler alert they are remarkably similar to the categories of assets), discuss a few bookkeeping tips you can utilize to track your liabilities, and how to avoid the “debt trap”. 

Key Issues - Owner Perspective:

1. What is the definition of liability and how can it help me grow my business? 
2. What are the various types of liabilities and which ones am I using in my business currently? 
3. What other ways can my debt be used or restructured?

What You Need to Know - The What

Liabilities come in different flavors, including current and long-term liabilities. Liabilities are a vital aspect of a company because they are used to finance operations, paying for large expansions, controlling cash flow, and they can also make transactions between businesses more efficient. 

Current Versus Long-Term Liabilities
Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period. Ideally, investors want to see that a company can pay current liabilities with cash. 
Some examples of current liabilities include:

1. Payroll expenses 
2. Accounts payable
3. Monthly operating costs

In contrast, investors want to see that long-term liabilities can be paid with assets derived from future earnings or financing transactions. 
Some examples of long term liabilities include:

1. Mortgages
2. Government or private loans
3. Capital or rental leases

The Relationship Between Liabilities and Assets
Assets are the things a company owns—or things as a right to-- including tangible items such as buildings, machinery, and equipment as well as intangible items such as accounts receivable, interest owed, patents or intellectual property. When a company acquires a new Asset they do so either by taking on a liability or reducing their cash asset by the same amount. Liabilities are often attached to a specific asset that when converted into cash, the resulting amount is enough to settle the debt owed for the asset. 

What Is the Difference Between an Expense and a Liability?
Expenses and liabilities are not the same and should not be used interchangeably. Expenses are the costs of a company's operation ( think pens, paper, sticky notes, rent for the month, etc), while liabilities are the obligations and debts a company owes. Expenses can be paid immediately with cash but when the payment is delayed by use of debt (credit card, loans, etc) it then becomes a liability. 

​What You Need to Do​​ - The How

1. Always have enough cash on hand to pay current obligations.
2. Do not over leverage your assets!
3. Keep a close eye on interest rates on debt.

 
Additional Resources 

1. Check out Kash’s Youtube Playlist: Bookkeeping basics for small business owners. 
2. Compare credit cards and find zero interest cards here.
3. Liabilities Definition by Accounting Tools https://www.accountingtools.com/articles/what-are-liabilities.html

 

Shows: 
Previous: Assets, work what you have! 
Next: Liabilities, taming the debt monster.

​Written by Kash the bookkeeper  
Grab your free Bookkeeping Checklist here!
You can connect with Kash on any of her seriously social platforms under the handle @Kashthebookkeeper
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