Liability analysis in accounting in today’s complicated business world is more difficult as each new financial vehicle comes to market. A liability is any debt obligation that a company owes a third party. The two categories are short-term or current and long-term liabilities. Current liabilities are debts that a company must pay within a year. Anything longer than a year is a long-term debt. Liability analysis in accounting endeavors to classify and account for each of these on balance sheets to determine the financial viability of the company.
To understand the process of liability analysis in accounting, here are few key terms:
Variable and fixed liabilitiesVariable liabilities can change given market conditions. You record the variable debt at certain price in the accounting ledger with the knowledge that it can increase or decrease in price. Employee stock options are an example of a variable liability. Fixed liabilities are price certain and the value of the debt doesn't change over time.
Current assetsCurrent assets are an integral component of any balance sheet. A current asset is convertible into cash within one business cycle. This cycle is usually between 60 and 180 days depending on the accounting procedures of the company. Examples of current assets are cash, investments, inventory, accounts receivable and pre-purchased expenses.
Debt ratioThe debt ratio is all company debt divided by all of the assets. A debt ratio that's larger than one indicates a company with more debt than assets. Conversely, a ratio smaller than one, means the company has more assets than debt. The debt ratio is an excellent tool to measure the ability of a company to pay future debt.
Generally Accepted Accounting Principles (GAAP)All procedures in accounting liability analysis operate under a larger set of governing rules entitled the Generally Accepted Accounting Principles or GAAP. The Financial Accounting Standards Board or FASB is the body that issues these rules and guidelines.
Cost capitalizationCost capitalization is part of the uniform capitalization rules that state how your company should record costs for liability analysis.
Internal Revenue Service.