Whether you're reviewing your personal finances, looking at buying a small business or investing in a stock, you'll want to take a close look at the liabilities involved. Learning how to calculate total liabilities and net worth in these situations is fairly easy if you ask a few key questions.
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What Are Liabilities?
In finance, liabilities are any amounts you or a business owes. Short-term liabilities are those that need to be paid within a year. Examples include your latest utility bill, account payables and bills received from vendors or suppliers. These are known as current liabilities.
If you have a mortgage, student loan or car loan, or a business has a loan it's paying off over the course of several years, these are non-current liabilities. If you might have a liability you want to address during your planning, that's classified as a contingent liability, explains the Corporate Finance Institute.
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Calculating Personal Liabilities
If you have a budget and use some type of software to manage it, it might be a good idea to set off your current and non-current liabilities for quick reference. For example, if you use a simple spreadsheet, you can make your liabilities red, or put them under two headings.
You can then set up a formula on a separate total line to keep a current update of these liabilities. To keep an eye on your net worth, list your total liabilities, in addition to your short- and long-term debts.
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Calculating a Business’s Liabilities
If you have a small business or are looking at buying or investing in one, ask for the company's balance sheet. That is a simple accounting equation that lists a company's assets and liabilities, showing its net worth, explains FreshBooks. A simple asset/liability equation using balance sheet information should break down liabilities into current and non-current categories.
Calculating Corporate Liabilities
If you are looking at investing in a corporate stock, look at the balance sheet for assets, liabilities and stockholder's equity. If you want to know what would happen if the company closed, you need to look at the value of its assets, the amount of its total (current and non-current) liabilities and how much money goes to the stockholders.
Stockholder equity is basically what remains after you subtract liabilities from assets, according to The Motley Fool. As an investor, you'll want to look at the different types of stock you can buy, such as common and preferred.
Don’t Forget Interest
Don't forget to consider interest when calculating long-term or annual liabilities. For example, if you have a credit card with $2,000 in charges on it and you're paying down $100 per month, your balance at the end of the year won't be $800 (unless you did a balance transfer at 0 percent).
If you have an APR of 15 percent, your balance at the end of the year will be greater than $800. Look at the section of your monthly statement that shows what your long-term payoff and interest will be if you only make the minimum payments to see if you want to pay off a card faster.
If you take out a $300,000 mortgage and are wondering what your equity will be next year, you should know that during the first years you have a mortgage, much of your monthly payment goes to interest – your equity increases in the later years of the loan term.