How to calculate liabilities on your balance sheet
- What are total liabilities?
- Types of liabilities on the balance sheet
- How to calculate total liabilities
- Common calculation mistakes to avoid
- Understanding total liabilities on the balance sheet
- Key financial ratios using total liabilities
- Why calculating total liabilities matters for your business
- How often should you calculate total liabilities?
- Automate liability tracking and reporting with Ramp's AI-powered accounting
Managing your company’s financial obligations starts with understanding total liabilities, the full picture of what you owe today and in the future.
Total liabilities capture everything from short-term obligations like vendor payments and payroll to long-term commitments such as loans and lease obligations, all of which shape your balance sheet and financial risk profile. Getting this number right affects creditworthiness, funding decisions, and how confidently you can plan for growth.
What are total liabilities?
Total liabilities represent all financial obligations your business owes to external parties, including creditors, suppliers, employees, and lenders. They reflect the claims others have on your company’s assets and show how much your business must repay over time, both in the short term and long term.
Finance teams rely on total liabilities to assess leverage, solvency, and overall financial health. Tracking this figure helps you understand borrowing capacity, evaluate risk, and make informed decisions about capital structure as your business grows.
How total liabilities fit into the accounting equation
Total liabilities are a core part of the accounting equation, which underpins double-entry bookkeeping:
Assets = Liabilities + Equity
This equation must always balance. When liabilities increase, such as when you take on a loan, assets increase through incoming cash or equity decreases elsewhere. Every transaction affects at least two components of the equation, ensuring your balance sheet stays in balance and accurately reflects your financial position.
The difference between total liabilities and total debt
Although the terms are often used interchangeably, total liabilities and total debt are not the same. Total liabilities include all financial obligations, while total debt refers only to borrowed money that must be repaid with interest.
| Aspect | Total liabilities | Total debt |
|---|---|---|
| Definition | All financial obligations owed to external parties | Borrowed money that requires repayment with interest |
| Includes | Accounts payable, accrued expenses, deferred revenue, and all debt | Loans, bonds, credit lines, and mortgages |
| Excludes | None; encompasses all obligations | Operating liabilities like accounts payable |
| Balance sheet location | Entire liabilities section | A subset of current and long-term liabilities |
| Common use | Assessing overall financial obligations | Evaluating leverage and interest burden |
Types of liabilities on the balance sheet
Liabilities are grouped based on when they’re due, which helps clarify how soon your business needs to use cash to meet its obligations. This timing matters for cash flow planning, working capital management, and assessing financial risk.
Current liabilities
Current liabilities are obligations your business expects to settle within one year or within its normal operating cycle, whichever is longer. These liabilities demand near-term cash or asset usage and have a direct impact on liquidity.
Common current liabilities include:
- Accounts payable: Amounts owed to suppliers for goods and services already received
- Wages payable: Earned but unpaid employee compensation
- Short-term loans and lines of credit: Borrowed funds due within 12 months
- Accrued expenses: Costs incurred but not yet paid, such as utilities or professional services
- Unearned revenue: Customer payments received before delivering goods or services
- Current portion of long-term debt: The portion of long-term loans due within the next year
- Taxes payable: Income, sales, and payroll taxes owed
- Interest payable: Accrued interest on outstanding debt
Long-term liabilities
Long-term liabilities are obligations that extend beyond one year. These commitments shape your company’s capital structure and influence long-term financial flexibility.
Examples of long-term liabilities include:
- Bonds payable: Debt securities issued to investors
- Mortgage payable: Loans secured by real estate
- Long-term notes payable: Formal loan agreements with banks or other lenders
- Pension obligations: Future retirement benefits owed to employees
- Lease liabilities: Long-term commitments for equipment or property rentals
- Deferred tax liabilities: Taxes owed in future periods due to timing differences
Contingent liabilities and other obligations
Contingent liabilities are potential obligations that depend on future events, such as lawsuits, guarantees, or product warranties. You record them on the balance sheet only when the obligation is probable and the amount can be reasonably estimated.
When contingent liabilities don’t meet recognition thresholds, they’re disclosed in the notes to the financial statements instead. Tracking these exposures still matters, since they can affect future cash flows and financial risk if circumstances change.
How to calculate total liabilities
Calculating total liabilities starts with your balance sheet and ends with a single figure that represents everything your business owes. While the math itself is simple, accuracy depends on properly identifying and classifying each obligation.
The total liabilities formula
The most direct way to calculate total liabilities is to add together all short-term and long-term obligations:
Total liabilities = Current liabilities + Long-term liabilities
You can also calculate total liabilities using the accounting equation:
Total liabilities = Total assets – Shareholders’ equity
Both approaches produce the same result. The first method builds the number from individual liability accounts, while the second derives it indirectly from assets and equity totals.
Step-by-step calculation process
To calculate total liabilities accurately, work through the balance sheet methodically:
- Identify all current liabilities: Review your balance sheet and list every obligation due within the next 12 months
- Sum current liabilities: Add together accounts payable, accrued expenses, short-term debt, and other current obligations
- Identify all long-term liabilities: List obligations due beyond one year, such as loans, bonds, and long-term lease commitments
- Sum long-term liabilities: Total these balances, excluding any current portions already counted
- Calculate total liabilities: Add current and long-term liability subtotals together
- Verify your result: Confirm the balance sheet still satisfies Assets = Liabilities + Equity
Practical calculation example
The example below shows how a mid-sized software company might calculate total liabilities using balance sheet data:
| Liability category | Account | Amount |
|---|---|---|
| Current liabilities | Accounts payable | $125,000 |
| Accrued salaries | $85,000 | |
| Unearned revenue | $200,000 | |
| Current portion of term loan | $50,000 | |
| Sales tax payable | $15,000 | |
| Current liabilities subtotal | $475,000 | |
| Long-term liabilities | Term loan (less current portion) | $350,000 |
| Equipment lease obligations | $75,000 | |
| Deferred tax liabilities | $30,000 | |
| Long-term liabilities subtotal | $455,000 | |
| Total liabilities | $930,000 |
In this example, the company combines $475,000 in current liabilities with $455,000 in long-term liabilities to arrive at $930,000 in total liabilities.
Common calculation mistakes to avoid
Even experienced finance teams can make errors when calculating total liabilities. These mistakes often stem from classification issues or incomplete balance sheet reviews, and they can distort liquidity and leverage metrics.
Forgetting the current portion of long-term debt
The portion of a long-term loan due within the next 12 months must be classified as a current liability, not a long-term one. Misclassifying this amount overstates long-term obligations and understates short-term liquidity risk.
Misclassifying liabilities by timeframe
Payment timing determines whether a liability is current or long term. A loan due in 13 months belongs in long-term liabilities, while one due in 11 months is current. Small classification errors can materially affect ratios like the current ratio.
Omitting accrued expenses
Accrued expenses represent costs your business has already incurred but hasn’t yet paid. Utilities, professional services, interest, and employee bonuses are commonly missed, especially when invoices arrive after period close.
Double-counting obligations
Each liability should appear only once in your total. A common error is including the current portion of a loan in both current and long-term totals, which inflates total liabilities and throws off balance sheet accuracy.
Understanding total liabilities on the balance sheet
The balance sheet shows your company’s financial position at a specific point in time, and total liabilities are a central part of that snapshot. Reviewing liabilities in context helps you understand not just what you owe, but how those obligations fit into your broader financial structure.
Where total liabilities appear on your balance sheet
Total liabilities appear between assets and equity on the balance sheet. Current liabilities are listed first, followed by long-term liabilities, with a subtotal showing total liabilities before the equity section begins.
This layout makes it easier to see how much of your business is financed through obligations versus owner investment. It also allows readers to quickly assess short-term versus long-term payment pressures.
How to read and analyze the liabilities section
When analyzing liabilities, compare current figures to prior periods to identify trends. Rising current liabilities can signal cash flow strain, while declining long-term debt may indicate deleveraging or refinancing activity.
It’s also important to look at the mix of liabilities. A shift toward a higher proportion of current liabilities may suggest tighter liquidity or limited access to long-term financing.
The relationship between assets, liabilities, and equity
Assets represent what your business owns, liabilities represent what it owes, and equity reflects the owners’ residual claim. Together, these elements explain your company’s net worth and capital structure.
For example, if a company has $500,000 in assets and $300,000 in total liabilities, the remaining $200,000 represents shareholders’ equity. This amount reflects what would remain if all assets were sold and all obligations were paid.
Key financial ratios using total liabilities
Financial ratios turn total liability figures into practical signals about risk, leverage, and liquidity. These ratios help you evaluate financial health over time and compare your business to peers.
Debt-to-equity ratio
Debt-to-equity ratio = Total debt / Total equity
The debt-to-equity ratio measures how much of your business is financed through borrowing versus owner investment. Higher ratios indicate greater leverage and risk, while lower ratios suggest a more conservative capital structure.
Acceptable ranges vary by industry, but many lenders view ratios between 1.0 and 1.5 as manageable for established businesses.
Debt-to-assets ratio
Debt-to-assets ratio = Total debt / Total assets
This ratio shows what percentage of your assets is financed through debt. A lower ratio means more assets are funded by equity, which generally reduces financial risk.
Lenders often prefer debt-to-assets ratios below 0.5, though capital-intensive industries may operate comfortably at higher levels.
Current ratio
Current ratio = Current assets / Current liabilities
The current ratio evaluates your ability to cover short-term obligations with short-term assets. Ratios above 1.0 indicate positive liquidity, while ratios below 1.0 may signal cash flow pressure.
Many healthy businesses aim for a current ratio between 1.5 and 3.0, depending on industry norms and operating models.
How to interpret your liability ratios
Understanding ratio ranges helps put the numbers in context rather than treating them as pass-fail metrics.
| Ratio range | What it means | Pros | Cons |
|---|---|---|---|
| Low ratios (Debt-to-equity < 0.5) | Conservative capital structure | Lower financial risk, stronger resilience | Potentially slower growth |
| Moderate ratios (Debt-to-equity 0.5–1.5) | Balanced leverage | Efficient use of capital with manageable risk | Requires ongoing monitoring |
| High ratios (Debt-to-equity > 1.5) | Aggressive leverage | Higher growth potential and tax benefits | Increased bankruptcy and refinancing risk |
Why calculating total liabilities matters for your business
Tracking total liabilities isn’t just an accounting requirement. It directly influences how lenders, investors, and internal stakeholders assess your company’s financial stability and decision-making capacity.
Financial health and creditworthiness
Total liabilities play a major role in how banks and other lenders evaluate risk. Lower liabilities relative to assets generally translate into better borrowing terms, lower interest rates, and more flexibility when you need access to capital.
When liabilities grow faster than assets, it can signal overextension. Monitoring this balance helps you catch potential issues before they affect financing options or covenant compliance.
Investor confidence and business valuation
Investors use total liabilities to understand downside risk and capital structure. High obligations can limit strategic flexibility, while a well-managed liability profile signals disciplined financial management.
In acquisitions and fundraising, liabilities factor directly into valuation models. Buyers and investors often adjust offers based on assumed obligations, making accurate liability tracking essential for protecting equity value.
Cash flow planning and operational decisions
Liabilities determine when cash must leave the business. Understanding payment timing helps you plan hiring, inventory purchases, and expansion without creating unnecessary cash strain. Clear visibility into upcoming obligations also makes it easier to prioritize spending and avoid surprises during month-end or quarter-end close.
Regulatory compliance and audit readiness
Accurate liability reporting supports compliance with accounting standards such as GAAP. Clean, well-documented liability records reduce audit friction and lower the risk of restatements or late adjustments.
Consistent tracking also shortens close cycles and makes it easier to respond to lender, investor, or auditor questions with confidence.
How often should you calculate total liabilities?
How frequently you calculate total liabilities depends on your reporting requirements, growth stage, and how actively you manage cash and financing. For most businesses, consistency matters as much as frequency.
- Monthly: Calculate total liabilities as part of your monthly close to keep financial statements accurate and spot trends early. This cadence supports better forecasting and cleaner reporting.
- Quarterly: Public companies and businesses with external investors typically calculate liabilities quarterly for formal reporting. Quarterly reviews also provide a useful checkpoint for leverage and liquidity.
- Annually: At a minimum, calculate total liabilities for year-end financial statements and tax filings. Annual totals support budgeting, planning, and long-term strategy.
- Event-driven: Recalculate liabilities when raising capital, refinancing debt, pursuing an acquisition, or making major operational changes. Lenders and investors expect current, reliable figures during these moments.
Automate liability tracking and reporting with Ramp's AI-powered accounting
Calculating liabilities accurately is crucial for financial reporting, but manual tracking across credit cards, bills, and accruals creates room for error and delays your close. Ramp's accounting automation software eliminates the guesswork by automatically tracking, coding, and reconciling all liabilities in real time so your balance sheet stays accurate and audit-ready.
Ramp captures every liability as it occurs. from corporate card transactions to vendor bills, and codes them automatically using AI that learns your chart of accounts. When employees swipe a card or submit an expense, Ramp matches the transaction to receipts, applies the correct GL codes across all required fields, and flags anything that needs review.
Here's how Ramp keeps liability reporting accurate:
- Real-time liability tracking: Every transaction posts to the correct liability account as it happens, so you always know what you owe
- Automated accruals: Ramp posts and reverses accruals automatically when invoices arrive, ensuring expenses land in the right period and liabilities reflect true obligations
- Audit-ready documentation: All receipts, approvals, and supporting documents attach automatically to each transaction, giving auditors the trail they need
Try a demo to see how Ramp helps finance teams close their books 3x faster with complete liability visibility.
FAQs
Total liabilities include all financial obligations your business owes, such as accounts payable, accrued expenses, deferred revenue, and debt. Total debt refers only to borrowed money like loans, bonds, and credit lines that require interest payments.
Most businesses calculate total liabilities monthly as part of the close process. You should also recalculate when raising capital, refinancing debt, preparing financial statements, or making major operational decisions that affect cash flow.
No. Expenses represent costs incurred during operations and appear on the income statement. Liabilities represent obligations owed and appear on the balance sheet, even if the related expense was recorded earlier.
Only if the obligation is probable and the amount can be reasonably estimated. Contingent liabilities that don’t meet these criteria are typically disclosed in the notes to the financial statements rather than recorded on the balance sheet.
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