How to calculate liabilities on your balance sheet

Liabilities represent what your business owes. This includes your business’s financial obligations, from short-term expenses to long-term debts. On a balance sheet, liabilities help explain how operations are funded and how much your business owes at any given time.

Having insight into your business liabilities can help you understand your company's value and figure out other important ratios, such as debt-to-equity or working capital. In this post, we'll cover what liabilities are, how to calculate them, and why it's an important exercise for your business.

What are liabilities?

A liability is any debt your company owes to another party that requires future payment or service. These include day-to-day obligations to business partners and employees as well as debt taken on to finance the organization.

You can group liabilities into two categories: current and non-current.

• Current liabilities are due within a year and cover items like accounts payable, accrued wages, and short-term loans
• Non-current liabilities take longer to settle and often include business loans, deferred tax liabilities, and long-term lease obligations

You list current and non-current liabilities separately on your balance sheet, which allows you to calculate key financial ratios like the current ratio.

How to calculate liabilities

You can calculate liabilities by adding together everything your business owes to external parties. This includes current liabilities, such as accounts payable and accrued expenses, as well as non-current liabilities like long-term loans and deferred tax obligations. This figure appears on your balance sheet.

Here's a look at how to calculate liabilities step by step:

Step 1: List your liabilities

To start calculating your liabilities, you first need to know which types you have.

There are several types of liabilities that might appear on your company’s balance sheet. Usually, larger companies have more liability categories than smaller businesses.

Long-term liabilities

Long-term liabilities, also called non-current liabilities, are obligations with payments that extend for more than a year. Lenders consider these liabilities when determining a business's creditworthiness.

Examples of long-term liabilities include:

• Bonds payable: These are debt securities issued by a company to investors, promising to pay a specified amount of interest over a set period and repay the principal at maturity
• Mortgages: Long-term loans specifically for purchasing property, where the property itself serves as collateral until the loan is fully repaid
• Deferred tax liabilities: Taxes that are incurred but not yet paid, often due to timing differences in recognizing income or expenses for tax and accounting purposes
• Deferred compensation: Compensation that employees will receive in the future for services rendered currently, such as pensions or stock options
• Pension liabilities: Obligations a company has to pay its employees' pension benefits in the future
• Notes payable: Notes payable are long-term debts that a company owes to lenders, such as financial institutions and banks

Short-term liabilities

Short-term liabilities, or current liabilities, are short-term debts that a company will need to repay within a year.

Examples of short-term liabilities include:

• Accounts payable
• Payroll
• Dividends payable
• Taxes owed
• Lease payments
• Utilities
• Credit card debt
• Insurance premiums
• Unearned revenue

Contingent liabilities

Some company balance sheets also include a section that includes contingent liabilities, or obligations that a company may or may not owe depending on external factors. Pending lawsuits are an example of a contingent liability since the company’s obligation will depend on the verdict.

Step 2: Include liabilities on your balance sheet

You should include your liabilities in their own section of the balance sheet. This section lies below the "Assets" section and above the "Owner's Equity" section.

Most balance sheets break down liabilities into individual items, listed under the headings “Current Liabilities” and “Long-Term Liabilities.” To the right of each item, your balance sheet will show the value of that liability, adding up to a “Total Liabilities” number.

The "Assets" section of a balance sheet is typically also broken down into long-term and short-term sections. These include both liquid assets, or those that a company can easily convert into cash, and non-liquid assets, such as real estate. Companies pay for current liabilities using current assets.

The difference between total assets and total liabilities is the value of the owner’s equity, which typically appears at the bottom of a balance sheet. Keep in mind that a balance sheet captures the financial picture of your company at one point in time.

Any change in the value of assets or liabilities on the balance sheet can impact the value of equity. By comparison, a company's income statement, or profit and loss statement, shows how revenues and expenses have changed over time.

Step 3: Add up your liabilities

To calculate your liabilities, simply list out the amount that your company owes across all of its obligations (both current and future) and add them together. This may require gathering up bills, loan documents, and other important paperwork.‍

For example, if ACME Corp. owes the following:

Then they'll need to pay $1.7 million to remain current on their liabilities this year.

To determine your total liabilities, add together your short-term liabilities. In the example above, $20.8 million + $1.7 million = $21.5 million. So, ACME Corp.'s total liabilities are $21.5 million. If you use accounting software, it'll typically calculate your liabilities for you, as long as you keep the system updated.

Using the accounting formula above, you can subtract your total liabilities from your total assets. This will tell you the value of your total equity. You can use this information to determine your equity multiplier ratio, which is a financial leverage ratio that indicates to what degree shareholder equity funds assets.

Step 4: Check your work with the accounting formula

Liabilities are one component of the accounting equation used to build a balance sheet. In double-entry accounting, you can use the following formula to check whether your books add up.

Assets = Liabilities + Equity

Equity refers to a company's assets minus its debts. Assets are items of financial value, such as cash or stocks.

Calculating liabilities accurately ensures proper financial reporting and decision-making. Regular monitoring of these obligations helps businesses maintain healthy cash flow and meet their financial commitments effectively.

How to calculate total liabilities

Total liabilities reflect the sum of short-term and long-term liabilities (and contingent liabilities, if applicable). This is the figure that shows how much your company owes on obligations both now and in the future.

To calculate your total liabilities, simply add up all the short-term and long-term debts listed on your balance sheet.

How to calculate current liabilities

To calculate current liabilities, add together all of your short-term liabilities that you owe to lenders within the next year or less.

Current liabilities include payments due on customer deposits and long-term loans (such as equipment loans). Other examples include employee salaries, interest payable, and money you owe to vendors and suppliers.

The balance sheet includes the amount owed for each short-term liability. The totals reflect the accounting period in focus, whether that’s a month, quarter, or full year. When these amounts are added together, the result is the total current liabilities.

Liability ratio formula

The liability ratio formula measures how much of your company’s assets are financed through liabilities. These metrics compare different aspects of a company's liabilities to its assets or equity, providing insight into financial stability and risk levels.

Among the most widely used liability ratios are the debt-to-equity ratio and the quick ratio. Each offers a different perspective on financial strength.

Debt-to-equity ratio

The debt-to-equity ratio shows the relationship between what your company owes and what owners have invested.

Debt-to-equity ratio = Total liabilities / Shareholders' equity

A ratio of 1.0 means liabilities and equity are equal. Higher ratios suggest increased reliance on debt financing, which can signal risk during downturns.

Quick ratio

The quick ratio measures your ability to cover short-term obligations using liquid assets. It excludes inventory, which may not be easily converted to cash.

Quick ratio = (Current assets – Inventory) / Current liabilities

A ratio above 1.0 generally suggests healthy liquidity. Businesses in cash-driven industries often aim for higher quick ratios to ensure they can meet day-to-day expenses without delays.

Debt-to-equity example

Let's walk through a quick example using the debt-to-equity ratio. Imagine ABC Manufacturing has total liabilities of $500,000 and shareholders' equity of $750,000. The calculation would be:

Debt-to-equity ratio = $500,000 / $750,000 = 0.67

This result of 0.67 means the company has 67 cents of debt for every dollar of equity, which generally indicates a healthy balance between borrowed funds and owner investment.

Companies with strong liability ratios often enjoy better borrowing terms, increased investor confidence, and greater flexibility during economic downturns. Conversely, poor ratios can signal potential cash flow problems or overleveraging.

Liability ratios provide essential insights into financial stability, helping stakeholders make informed decisions about investments, lending, and business partnerships with confidence.

What is the purpose of calculating liabilities?

A company’s liability level is one of the basic metrics that stakeholders use to understand the business's value and prospects. It’s so important that public companies must include their balance sheet, which includes a breakdown of liabilities, in the annual report that they file with the Securities and Exchange Commission (SEC).

Business leaders need a solid understanding of their current and future liabilities to properly gauge the financial health of the organization. For companies that need additional capital, their liability levels may be a key factor considered by both potential investors and lenders involved in the underwriting process if the company wants to borrow money.‍

If you ever decide to sell your business, potential acquirers will look at its liability levels as one factor in the company’s valuation.

Streamline your financial reporting with Ramp

To manage liabilities effectively, you need accurate, real-time financial information. Ramp's all-in-one finance operations platform gives you that visibility and more.

Ramp's accounting automation software integrates with popular accounting tools and ERPs like QuickBooks, NetSuite, and Xero to give you a holistic view of your financial data. By providing detailed insights and real-time data, Ramp simplifies the process of tracking and managing liabilities.

Whether it's short-term obligations such as payroll and accounts payable or long-term commitments such as bonds and mortgages, Ramp offers a streamlined approach to help you meet your financial obligations.

Ready to learn more? Try an interactive demo and see why more than 40,000 businesses have saved $10 billion and 27.5 million hours with Ramp.