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What are 'liabilities'?

Liabilities are the debts the firm owes to others.

Most firms purchase their assets, particularly their stocks, on credit. This means that the goods have been purchased and are owned by the firm, but they will not be paid for until later. Debts are liabilities.

They may be:

1. Long-term liabilities

These are debts not repayable for at least a year. Long-term loans are an example.

2. Current liabilities

These are debts which are repayable within a year. Trade creditors (that is, firms from whom goods have been bought on credit) are the main example.

Presentation of accounting information Requirements of an accounting system

The recording and presentation of financial information is the responsibility of the accounting division headed by the finance manager.

A firm's accounting system should be able to provide the following information:

- a record of day-to-day transactions,

- a statement of how well the firm is running over a period of time,

- a summary of the firm's financial position at a given date,

- a guide to future action and decision-making.

The first three requirements are met by specific parts of the accountmg system. The day-to-day transactions are first noted in the original documents, such as the invoices, credit notes and receipts. They are then summarised in day books before being fed into the ledger where their full effect is recorded. The ledger is made up of individual accounts - one for each item under which information is required.

From the ledger, the balances of some accounts are transferred to the trading and profit and loss account, which shows the profit for the year (that is, the second requirement above), or are summarised in the balance sheet to show the financial position at a given date (the third requirement above).

There is no simple document which directly gives the answer to the fourth requirement. This demands an intelligent interpretation of the whole 318 accounting system (particularly of the ratios we considered earlier in this chapter), coupled with a good understanding of such factors as economic trends, possible changes in the law, and statistics generally.

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