What are passives? Definitions, types and examples

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Liabilities are an essential component of a company’s balance sheet.

What are passives?

Liabilities are what is owed by an individual or a company. These are, in accounting terms, the current obligations of a company, arising from past transactions, through which economic benefits are expected.

In other words, liabilities are a source of funding usually in the form of debt or borrowing from another party that can be used to purchase assets or fund operations. Liabilities are also claimed by creditors who are required to repay.

Liabilities are found under assets in the balance sheet section of the financial statements. For publicly traded companies, financial statements are filed quarterly and annually with the Securities and Exchange Commission.

Liabilities, assets and equity are the main components of the balance sheet. And a company’s balance sheet must be balanced: assets must equal liabilities and equity. Liabilities are measures that follow generally accepted accounting principles.

What are the types of liabilities?

Most liabilities can generally be classified as current or non-current based on when payments are due.

Fluent

Liabilities that are generally expected to be settled within one year from the date of the published balance sheet for a period are classified as current liabilities. This includes short-term borrowings and accounts payable, which are bills or invoices for the purchase of goods or payment for services from a supplier on credit.

Another important current liability is deferred income, also known as deferred income or unearned income, which is when a company receives payment before the delivery of its goods or services.

Other current liabilities include accrued wages, accrued interest, and accrued expenses that have not been recorded on the company’s books, which may be for employees, and other operating costs. Some companies provide a breakdown of their current liabilities, while others aggregate them.

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TheStreet Dictionary Terms

Not current

All liabilities not classified as current are classified as non-current or long-term. Deferred revenue may sometimes be classified as non-current because delivery of goods or services may take more than a year after payment. Other types of non-current liabilities are long-term financial liabilities such as long-term debt and deferred tax liabilities

Debt can be current or non-current, depending on the term to maturity. Debt that is one year or less can be converted into cash more quickly, while a company can hold on to debt that is more than one year old.

What are contingent liabilities?

Sometimes a company’s potential debts are taken into account and money is set aside to cover them (almost in the same way that banks have reserves against possible bad debts). Contingent liabilities can include money set aside to cover lawsuits or guarantees, for example. The downside of contingent liabilities is that a large amount can negatively affect a company’s share price.

Contingent liabilities are usually mentioned in the notes to the financial statement, but are not recorded until they are tracked or are likely to occur. A recognized contingent liability is recorded as an expense in the income statement and as a liability in the balance sheet.

Liabilities Example: Apple (NASDAQ: AAPL)

Below is the list of Apple’s liabilities on its balance sheet, broken down into current and non-current liabilities. Companies, and Apple is no exception despite its large cash position, take on debt as part of financing their operations. Term debt – both current and non-current – has increased, and Apple notes in its financial statements how changes in interest rates can affect its interest payments.

All figures except percentage change are in millions of dollars and are from Apple’s 10-K.

Apple 2021 % Switch 2020

Current liabilities:

Accounts payable

54,763

29

42,296

Other current liabilities

47,493

11

42,684

Deferred revenue

7,612

15

6,643

Commercial paper

6,000

20

4,996

Term debt

9,613

9.6

8,773

Total current liabilities

125,481

19

105,392

Non-current liabilities:

Term debt

109 106

11

98,667

Other non-current liabilities

53,325

-2.1

54,490

Total non-current liabilities

162,431

6.1

153 157

Total responsibilities

287,912

11

258,549

Why are passives important?

Liabilities help investors understand the financial strength of a company. More liabilities than assets could mean that a business has a lot of debt to service and that could mean focusing more on paying it off than investing or expanding its operations.

Frequently Asked Questions (FAQ)

Below are answers to some of the most common passive investor questions.

Can the passive be negative?

Negative liabilities are very unusual. A negative liability would imply that a business paid more than it was required to repay.

What is the difference between liabilities and debt?

Liabilities represent all forms of financial obligations while debt is a liability that specifically represents borrowing in the form of a loan that needs to be repaid.

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