A balance sheet is built on two pillars, assets and liabilities. We have explored how to analyse and dissect balance sheet assets in our earlier blog to get insights into what they say beyond the face value. It is now time to focus on the other pillar of the balance sheet, i.e., liabilities. Check out this blog to get a clear understanding of balance sheet liabilities and their importance for various stakeholders.
Liabilities on a balance sheet are the amounts of money that a company owes to others. These can include loans, unpaid bills, taxes due, or money received in advance for services not yet delivered. In simple words, liabilities are what the company needs to pay back to its lenders in the future. Liabilities are further divided into current and non-current based on how soon they need to be paid.
Current Liabilities - Short-term loans or debts that have to be repaid by the company within a year
Non-Current Liabilities - Long-term loans or debts that the company has to pay after more than one year.
A detailed explanation of current and non-current liabilities is given below.
These are debts or obligations that a company must pay within one year. They show the company’s short-term financial health and its ability to pay bills in the near future. The common types of current liabilities that a company usually has include,
Trade payables refer to the amounts a company owes to its suppliers or vendors for goods or services purchased on credit. This means the company has received the goods or services but has not paid for them yet. These payments are usually due within a short period, like 30 to 90 days.
Example -
Consider Reliance Retail purchasing a large number of consumer goods, like soaps, shampoos, or snacks, from a supplier, but agreeing to pay the supplier after 30 days. Until Reliance makes the payment, the amount owed is recorded as trade payables. This is common in business as it helps manage cash flow better without needing to pay immediately.
Short-term borrowings are loans or credit facilities that a company takes from banks or financial institutions and is obligated to repay within one year. These borrowings are essential for companies as they help them manage their working capital needs or day-to-day operations, without putting a strain on cash reserves, especially in cases of temporary cash shortages.
Example -
A manufacturing company might take a working capital loan from the State Bank of India (SBI) to buy raw materials or pay salaries while waiting for customer payments to come in. Since the company is expected to repay this loan within a year, it is called a short-term borrowing.
These are amounts that a company sets aside to cover certain expenses that are expected to happen within the next year. These could include employee bonuses, income tax payments, or warranty repairs for products sold.
Example -
At the end of the financial year, Tata Motors might expect to pay bonuses to its employees. So, it sets aside a certain amount in advance as a provision for bonuses. Even though the bonus has not been paid yet, the company knows it is likely to pay it soon. Hence, it is considered a short-term provision.
Every company declares dividends even though they are not obligated to do them every year. The process of paying dividends to shareholders involves declaring them, then approving them at the AGM. There can also be cases where the dividends are declared and have yet to be paid. Once a company announces dividends, it becomes a legal obligation to pay within a short period and has to be reported separately under the head of current liabilities.
Example -
If Infosys declares a dividend of Rs. 10 per share in March and plans to pay it in April, the total amount due is shown as dividends payable until it is paid. This is a liability because the company has promised to pay its shareholders.
This is a broad category that includes several kinds of short-term obligations. It mainly includes -
Unearned Revenue - Money received in advance from customers for goods or services that will be delivered later.
Outstanding Expenses - Bills and expenses that are due but not yet paid (like electricity, rent, or salaries).
Statutory Dues - Government-related payments such as GST (Goods and Services Tax), TDS (Tax Deducted at Source), and PF (Provident Fund) that the company needs to pay.
Example -
Suppose Infosys, a large IT services company, receives Rs. 50,00,000 in advance from a client in the USA for a software project that will be delivered next month. These Rs. 50,00,000 are considered unearned revenue until the work is completed. Infosys may also have unpaid electricity bills and GST dues, which would be recorded under other current liabilities.
Non-current liabilities are the debts or obligations that a company has to pay after more than a year. Some examples of the non-current liabilities found in a balance sheet include,
Long-term borrowings are loans, bonds, or debentures that the company must repay after one year. These are usually taken to finance big projects or major investments and are paid back over several years with interest.
Example -
Consider Larsen & Toubro (L&T), a blue-chip company, has a loan of Rs. 500 crore from ICICI Bank to build highways or metro rail systems. If this loan is to be repaid over 5 years, it is considered a long-term borrowing. Similarly, any debentures or bonds issued by L&T to raise money from investors will also be reported under the head long-term borrowings in the balance sheet.
Deferred tax liabilities are taxes that a company will have to pay in the future because of timing differences between how income is shown in the books and how it is taxed. These differences usually happen because companies use different rules for depreciation and other accounting entries in their financial books compared to tax returns.
Example -
Tata Steel may calculate depreciation (reduction in asset value) differently in its accounting books and tax returns. This can result in lower taxes now, but higher taxes in future years. The extra tax that will be payable later is called a deferred tax liability. It shows that the company has a future tax obligation even if it is not paying it now.
The government provides financial support or grants to certain companies for long-term projects as tax incentives or support in capital-intensive businesses. Instead of treating this as income immediately, the company spreads it over the useful life of the asset. The portion to be recognised later is a deferred government grant (non-current liability).
Example -
Bharat Electronics Limited (BEL) might receive a Rs. 50 crore subsidy from the government to develop defence technology. BEL will record this as a deferred government grant and recognise a part of it as income each year, while the rest remains as a non-current liability.
Long-term provisions are amounts of money that a company sets aside today to take care of future expenses or obligations that will arise after a year. These could include costs like employee retirement benefits (pension, gratuity), warranties, or major repairs on assets.
Example -
Hindustan Unilever (HUL) may put aside a certain amount each year for pension payments to retired employees. Even though the payment will be made years later, the company recognises this future responsibility today by creating a long-term provision. This ensures that the company is financially prepared for such long-term obligations.
This includes any other future obligations the company must fulfil after one year that do not fit under specific categories. These can include advance payments for long-term contracts, environmental liabilities, or long-term deferred income.
Example -
Coal India may receive Rs. 100 crore in advance from a state government to supply coal over the next 3 years. The portion related to years 2 and 3 is recorded under other non-current liabilities, as the company still has to deliver coal in those future years.
Understanding the changes in the balance sheet liabilities is very important to analyse a company's financial health and business strategy. The interpretation of these changes is explained below.
When non-current liabilities (like long-term loans, bonds, debentures, or long-term provisions) increase, it usually means the company is raising funds for future growth or large projects. These liabilities are not due immediately but will have to be repaid after one year or more. An increase in non-current liabilities can be due to the company expanding operations, building new plants, acquiring assets, or entering new markets. It may also mean the company is relying more on debt instead of equity to finance its needs. However, too much increase could be a red flag if the company is over-borrowing and may struggle with repayments in the future.
Example -
If Adani Green Energy takes a 10-year loan to build a solar energy park, its non-current liabilities will increase. This may be a positive sign of future growth, but only if the company can generate enough returns to repay the loan later.
A decrease in non-current liabilities means the company is paying off its long-term debts or obligations. This can show financial stability, especially if it has enough cash flow to clear long-term loans. A decrease in non-current liabilities can indicate that the company is becoming less dependent on borrowed money, improving its financial position. It could also mean maturing loans are now shifting to current liabilities, if repayment is due soon. This is usually a positive sign, but we must check whether the repayment is from internal profits or from taking new short-term loans, which may not be good.
Example -
If Tata Motors repays part of a long-term loan taken to develop electric vehicles, the non-current liability amount will fall. This shows the company is actively managing its debt and reducing its interest burden.
An increase in current liabilities (like trade payables, short-term loans, and outstanding expenses) suggests the company has more short-term obligations to settle within one year. An increase in current liabilities could mean the company is purchasing more on credit, possibly due to business growth. It may also mean the company is facing cash flow issues and delaying payments. However, if current liabilities rise faster than current assets, the company might face a liquidity crisis, meaning it may not have enough cash to pay its dues on time.
Example -
If Reliance Retail’s trade payables rise sharply, it may indicate they are buying more inventory on credit due to increased sales demand. That can be healthy, but if not managed well, it could create payment pressure.
A decrease in current liabilities means the company is settling its short-term debts. This may reflect better cash management and stronger liquidity. A decrease in current liabilities could indicate that the company has paid off its short-term loans, bills, or creditors. It may now be in a position to negotiate better credit terms or operate more on cash transactions. While this is mostly positive, a sharp drop in trade payables could also mean declining business activity, so we should review sales and purchases together.
Example -
If Infosys reduces its outstanding expenses and pays suppliers earlier, current liabilities will decrease. This suggests they have healthy cash reserves and are managing working capital efficiently.
Companies must follow specific reporting requirements for balance sheet liabilities as per the Companies Act, 2013 and Indian Accounting Standards (Ind AS). These rules make sure that financial statements are clear, transparent, and comparable, so investors, regulators, lenders, and other stakeholders can understand the company’s financial position. Some of the common reporting requirements to be followed by companies are explained below.
All Indian companies (except banks and insurance companies) must prepare their balance sheets as per Schedule III of the Companies Act, 2013. This schedule provides a standard format that every company must use. Liabilities must be classified as:
Current Liabilities – due within 12 months
Non-Current Liabilities – due after 12 months
Each group has subheadings like borrowings, trade payables, provisions, and other liabilities.
Companies must clearly separate liabilities based on how soon they need to be paid. This helps users of financial statements understand how much the company owes in the short term and how much over the long term, which is essential for assessing liquidity and solvency.
The classification for current liabilities is given below.
Current Liabilities include trade payables, short-term loans, outstanding expenses, GST/TDS payable, etc.
Non-Current Liabilities include long-term borrowings, deferred tax liabilities, lease liabilities, and long-term provisions.
Companies must break down and explain the major liability items in the notes to accounts. This helps identify any payment delays, potential legal obligations, and creditor risks. For example -
For borrowings,
Type (secured or unsecured)
Name of lenders
Interest rates
Repayment terms
Purpose of borrowing (e.g., working capital, capital expenditure)
For trade payables, companies must disclose amounts owed to
Micro and Small Enterprises (MSMEs) separately, as per the MSMED Act
Other creditors
Contingent liabilities are possible obligations that may arise in the future depending on certain events (e.g., legal cases, guarantees, tax disputes). These contingent liabilities are not part of the liabilities in the balance sheet directly; however, they have to be disclosed in the notes to accounts.
Example -
If ITC Limited has a tax case pending with the Income Tax Department, it will disclose it under contingent liabilities with the amount and description.
Companies that follow Ind AS (applicable to listed and large unlisted companies) must also follow specific standards. Some of these standards include,
Ind AS 1 – Presentation of Financial Statements
Ind AS 107 – Financial Instruments Disclosures
Ind AS 19 – Employee Benefits (for provisions and obligations)
Ind AS 116 – Leases (for lease liabilities)
Ind AS 12 – Income Taxes (for deferred tax liabilities)
The need for these standards is to ensure
Proper classification
Valuation methods
Disclosure of assumptions
Movement (changes) during the year
The company’s statutory auditor must review the liability details to ensure the accuracy of the financial statements. The auditor’s report will mention whether the company’s liabilities are reported fairly and truthfully. This includes,
Properly classified and disclosed
Supported by documents and records
Not understated or hidden
Filing with ROC and SEBI (for Listed Companies)
All companies must file their balance sheet with the Registrar of Companies (ROC) via Form AOC-4 annually.
Listed companies must also submit their quarterly and annual financial statements to SEBI through stock exchanges (like BSE or NSE) in a timely and prescribed format.
It ensures public transparency and keeps regulators and investors informed.
Understanding red flags in a company’s liabilities provides insight into its financial health and allows investors and companies to analyse them effectively. Some of the key red flags to look out for in balance sheet liabilities are mentioned below.
Too Much Loan Burden - If a company keeps taking large loans, especially long-term ones, it may struggle to repay them in future. High borrowings mean more interest payments, which can reduce profits. Companies must borrow wisely and use loans for productive purposes. For investors, too much debt is a sign of financial pressure.
Delays in Paying Suppliers - If trade payables keep rising without a clear reason, it could mean the company is not paying suppliers on time, which can indicate cash shortages. It can damage relationships with vendors and may even lead to supply chain issues or legal disputes.
Short-Term Dues Are Growing Faster Than Assets - When a company’s short-term liabilities (like creditors and short-term loans) increase more than its current assets (like cash or receivables), it may face trouble paying its bills on time. This shows poor liquidity and may affect day-to-day operations.
Unclear or Large Provisions - If a company makes big provisions for future expenses (like legal disputes, warranties, or doubtful debts) without a clear explanation, it may be hiding risks or future losses. Investors should read the notes to accounts carefully for such details.
Hidden Future Liabilities - When a company mentions large contingent liabilities (like pending court cases or guarantees) but does not explain them properly, it is a concern. These can turn into real liabilities later and impact the company's finances.
Too Many Dues to Related Parties - If the company owes a lot of money to related parties like directors or group companies, it may raise questions. It can be a sign of poor transparency or misuse of funds, which investors should watch closely.
Balance sheet liabilities provide a snapshot of the borrowed funds of the company and its ability to manage the external obligations. Understanding this important aspect can help stakeholders pinpoint any red flags and optimise resource allocation within the organisation. Furthermore, it can also help investors make informed investment decisions and have a robust portfolio with long-term stability.
This article is an extension of our series on getting further insights into balance sheet items. We will further continue our series with the other two financial statements and considering each component in detail. Let us know your thoughts on the topic or if you have any queries on the same, and we will address them soon.
Till then, Happy Reading!
Read More: How to Analyse a Company's Competitive Advantage Using Porter's Five Forces?
Marisha Bhatt is a financial content writer @TrueData.
She writes with the sole aim of simplifying complex financial concepts and jargon while attempting to clarify technical and fundamental analysis concepts of the stock markets. The ultimate goal is to spread vital knowledge and benefit the maximum audience. Her Chartered Accountant background acts as the knowledge base to help clarify crucial concepts and create a sound investment portfolio.
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