Accounting Fundamentals: Liabilities & Working Capital

This cheat sheet covers the core concepts of liabilities, including operating and payroll liabilities, and their impact on working capital. It also explains accounts payable turnover and notes payable.

Core Principles

Liabilities represent probable future sacrifices of economic benefits arising from past transactions.
Current liabilities are obligations due within one year or operating cycle.
Long-term liabilities are obligations due after one year.
Deferred revenue is a liability for cash collected before earning it.
Working Capital = Current Assets - Current Liabilities.

Action Steps

Identify all current and long-term liabilities.
Calculate accounts payable turnover to assess payment efficiency.
Determine average days to pay payables.
Calculate working capital to understand short-term financial health.
Understand the components of notes payable (borrowed amount, repayment date, interest rate).

Formulas

$Accounts Payable Turnover = \frac{COGS}{Average Accounts Payable}$
$Average Days to Pay = \frac{365}{Accounts Payable Turnover Ratio}$
$Interest = Principal \times Annual Interest Rate \times \frac{\text{Number of Months}}{12}$
$Working Capital = Current Assets - Current Liabilities$
$A = L + E$
$Rev - Exp = NI$

Key Terms

Liabilities: Probable future sacrifices of economic benefits from past transactions.
Current Liabilities: Obligations due within one year or operating cycle.
Long-term Liabilities: Obligations due after one year.
Deferred Revenue: Cash collected for goods/services not yet provided.
Accounts Payable: Money owed to suppliers for goods or services received.
Accrued Expenses: Expenses incurred but not yet paid.
Notes Payable: A formal written contract specifying borrowing terms.
Working Capital: Measure of short-term financial health (Current Assets - Current Liabilities).
Contingent Liability: Potential liability from a past event, outcome uncertain.