Your liabilities are any debts that you have that must be paid. These can be things like loans, employee salaries, income and sales tax, lease agreements, etc.
Below we have a brief overview of how to calculate your liabilities. A word of caution—this is not something we recommend you do on your own. It’s in your best interest to work with a CPA who can run these calculations for you, to ensure you have an accurate and complete understanding of your liabilities.
The below information is a guide. Please contact a CPA to calculate your liabilities.
Step One: List Out Your Liabilities
This should include:
- Long-Term Liabilities
- Short-Term Liabilities
- Any Other Liabilities (i.e. sales tax or cross-company borrowing)
Remember, an expense is not a liability. Liabilities are debts you owe to banks, employees, suppliers, clients, etc.
Some common types of liabilities include:
- Payroll
- Taxes owed
- Utilities
- Credit card debt
- Insurance premiums
- Accounts payable
- Rent
If you’re not sure if your debt qualifies as a liability, speak to the most knowledgeable person you can—a CPA.
Step Two: Sort Your Liabilities
You will want to fully organize your liabilities within your balance sheet before completing the calculation. This ensures you have an accurate picture of all liabilities.
When sorting your liabilities, make sure you do so by category and by time period (i.e. short-term and long term). Organizing your liabilities ensures that you not only have all of the data that you need, but that it is specific to the type of liability and the period of time.
Step Three: Determine the Time Period
You’ll need to determine over what period of time you need to look at for the liabilities. This is typically a month, quarter, or year, in which you determine the total liabilities for that period only. Once you’ve selected the time period, you can begin to calculate the liabilities within that time period.
Step Four: Calculate Your Liabilities
Your total liabilities is typically the sum of all individual liabilities. This is typically listed on your balance sheet.
If you are running the calculation, you should do so using your accounting software as it will automate and give you the most accurate and up-to-date data (provided you have organized, categorized, and sorted liabilities correctly).
Your result should be total liabilities by category over the time period.
Why Calculate Liabilities?
Most companies calculate liabilities as part of a greater need to understand the current value of the business. This can be used in a number of ways, whether in acquisition or merger, seeking a funding round, or to predict future liabilities.
If you plan to sell your business, any inquiring buyer will absolutely need to see your liability calculation.
