This page describes the accounts of liabilities on balance sheet.
It emphasizes understanding the meaning of accounts rather than specialized accounting knowledge.
On the balance sheet, liabilities are listed in the upper of right side.
In the lower of right side on the balance sheet, net assets are listed.
The total amount of liabilities and net assets is called total capital.
- Liabilities
- It is described "負債", and called "husai", in Japan.
Liabilities are debts or burdens that are expected to have cash outflows in the future.
Liabilities mainly consist of interest–bearing debt related to the money financed to do business or interest–free debt incurred in the process of the business.
In a company, Liabilities is necessary for investment and business operation.
In equity investment, it is important perspective whether the company has been generated more profit than the cost needed to the liabilities.
From another perspective, liabilities can be divided into two types: legal debt and debt related only to profit and loss accounting.
The former includes Loans payable and accounts payable–trade that are obliged to repay, the latter includes provisions for future expenditures.
- Current Liabilities
- It is described "流動負債", and called "ryuudou husai", in Japan.
- Fixed Liabilities
- It is described "固定資産", and called "kotei husai", in Japan.
Liabilities are divided into current liabilities and fixed liabilities.
"Current" and "fixed" are like the speed at which money moves.
At the closing date on the balance sheet, "current" means that money is expected to move soon, and "fixed" means that money is not expected to move in the near future.
Specifically, there are two rules that distinguish between current liabilities and fixed liabilities: normal operating cycle rule and one–year rule.
According to accounting rules, the account that meet the normal operating cycle rule are first regarded as current liabilities, and then, the account that meet the one–year rule is also regarded as current liabilities.
Accounts that do not meet these two rules are included in fixed liabilities.
- Normal operating cycle rule about liabilities
- Debts generated by business transactions, which are the main purpose of a company, shall belong to current liabilities.
The overview of the normal operating cycle rule is shown in Figure 2-2-1 (a).
For example, notes payable, accounts payable, and advance payments are included in current liabilities according to this rule.
- One-year rule about liabilities
- Among the debts generated by transactions other than the main purpose of the company, debts with the term of less than one year shall be current liabilities, and those with the term of more than one year shall belong to fixed liabilities.
Accounts that meet the one–year rule belong to current liabilities, even if the account does not meet the normal operating cycle rule.
For example, short–term loans payable, accrued expenses, provision of reserve for bonuses, etc.
Accounts of liabilities are classified into current assets and fixed assets according to the normal operating cycle rule and the one–year rule.
Current liabilities are liabilities that meet the regular operating cycle standard and the one–year standard.
In other words, they are liabilities that arise from main business, or liabilities that must be fulfilled within one year.
Therefore, current liabilities include debt incurred in operating activities or debt that needs to be paid in the short term.
- Notes and accounts payable–trade
- It is described "支払手形及び買掛金", and called "shiharai tegata tegata oyobi kaikake kin", in Japan.
When buying and selling between companies, it is often traded with credit without moving cash at the time of buying and selling.
When a company purchases goods, etc. with credit, it is obliged to pay the price to the other party.
If there is a note as proof of this claim, it is called notes payable–trade, and if there is no note, it is called accounts payable-trade
Of course, notes payable have stronger legal effect.
Notes and accounts payable–trade increase not only when purchases have increased, but also when cash payments have been made slower in a planned way.
In other words, it also increases when the business is doing well or when the working capital required for the business decreases.
Therefore, although notes and accounts payable–trade are liabilities, they are usually not regarded as a problem just because they are large.
However, if sales decrease sharply or note and accounts receivable–trade cannot be collected as cash, the cash required for repayment may be insufficient and the company may be in crisis.
- Short–term loans payable
- It is described "短期借入金", and called "tanki kariire kin", in Japan.
Short–term loans payable is borrowing with a repayment deadline of one year or less.
Short–term loans payable has a lower interest rate than long–term loans payable, and is mainly used to cover the cash required for short–term business operations.
Although the period until repayment is short, depending on the creditworthiness, a company can continue paying only interest by refinancing without repayment of the principal.
It is included in current liabilities on a one–year basis.
- Current portion of long–term loans payable
- It is described "1年以内に返済予定の長期借入金", and called "ichi nen inai ni hensai yotei no tyouki kariire kin", in Japan.
Current portion of long–term loans payable is the portion of borrowing whose repayment deadline is within one year among long–term loans payable.
- Income taxes payable
- It is described "未払法人税等", and called "mi barai houzin zei tou", in Japan.
Income taxes payable. is the unpaid amount of corporate tax, etc.
Since the deadline for filing corporate tax is set to be two months after the closing, it will be included in current liabilities at the closing.
- Accounts payable–other
- It is described "未払金", and called "mi barai kin", in Japan.
Unpaid money on the balance sheet mainly includes accounts payable–trade, accrued expenses, and Accounts payable–other.
Of these, accounts payable–trade are unpaid money about expenses generated in the main business, and accrued expenses are unpaid money for services received under a certain contract.
And, the accounts payable–other in the balance sheet are unpaid money other than accounts payable and accrued expenses.
Specifically, this corresponds to unpaid money for consumables of office supplies such as personal computers.
On the accrual basis of the accounting principle, it is necessary to record expenses when the goods are received.
The balance sheet can be emporarily balanced by recording "accounts payable–other" in liabilities until the price is paid.
Accounts payable-other with a payment deadline of more than one year are included in long–term liabilities as long–term accounts payable-other.
- Accrued expenses
- It is described "未払費用", and called "mi barai hiyou", in Japan.
If a company receive continuous services under a certain contract, the price may be postpaid.
For example, payment of rent or lease contract.
If the company has not paid for the service due to closure, it is the accrued expenses that are recorded as an expense for the use of the service.
- Advances received
- It is described "前受金", and called "mae uke kin", in Japan.
Advances received are the reverse pattern of advance payments–trade.
If the product, product or service cannot be provided to the user immediately, a part of the price may be received.
Advances received is the amount received.
Since the assets increase by the amount received, the balance sheet is balanced by recording as "advances received" for what have to provide service, etc. on liability.
- Deposits received
- It is described "預り金", and called "azukari kin", in Japan.
Deposits received are money temporarily deposited by employees, etc. in order to pay to a third party.
For example, it is a deduction of taxes and social insurance premiums from employee salaries.
- Provision
- It is described "引当金", and called "hikiate kin", in Japan.
provision is an amount previously transfered as an expense for a specific expense or loss incurred in the future.
provision is named for their purpose.
For example, if the bonus from October last year to March this year is paid in July this year, the company with the March closing has not yet paid the bonus at the closing.
However, due to the accrual basis, the expense will correspond from October last year to March this year.
Therefore, the balance sheet is balanced by recording "provision for bonuses" as liabilities on the B/S at the same time recording "provision of reserve for bonuses" as expense in the P/L.
Among the provisions, provisions that are used for more than one year are included in fixed assets.
- Other
- It is described "その他", and called "sono ta", in Japan.
Other is a collective classification of less important liabilities that are not required to be stated in accounting rules.
Those that meet normal operating cycle rule or one–year rule are included in current liabilities, and those that do not meet them are included in fixed liabilities.
- Fixed Liabilities (Non–current Liabilities)
- It is described "固定資産", and called "kotei shisan", in Japan.
Fixed liabilities are liabilities other than current liabilities.
In other words, it is the liabilities that does not meet the condition of the normal operating cycle rule or the one–year rule.
That is, the meaning of "fixed" is that it is not a debt from a business transaction and there is no plans to repay it within a year.
- Long–term loans payable
- It is described "長期借入金", and called "tyouki kariire kin", in Japan.
Long–term loans payable is borrowing that has a repayment period of more than one year.
Usually, it is a large amount for the purpose of capital investment, and it is often repaid by positive cash flow from depreciation.
- Net defined benefit liability
- It is described "退職給付に係る負債", and called "taisyoku kyuuhu ni kakaru husai", in Japan.
Net defined benefit liability is the liability for future employees, which is the difference between the retirement benefit obligation and the pension assets.
The retirement benefit obligation is the present value of the total amount of future payments after retirement at a low discount rate.
In other words, the retirement benefit obligation is the amount of debt to the employee that the company currently considers sufficient for future retirement benefits.
On the other hand, pension assets are market value of assets that are accumulated by the company and managed by external institutions such as pension funds, among retirement benefit obligations.
Therefore, net defined benefit liability is the portion that is not funded as pension for the amount of the retirement benefit considered sufficient, that is, the fund is insufficient.
By the way, on accounting rules, the liability related to retirement benefits is described as "provision for retirement benefits" in the individual financial statements,
while it is described as "net defined benefit liability" in the consolidated financial statements.
And, there is a little differences (called unrecognized items) between these depending on the calculation method.
- Deferred tax liabilities
- It is described "繰延税金負債", and called "kurinobe zeikin husai", in Japan.
Deferred tax liabilities are the reverse pattern of deferred assets for tax purposes.
If a taxable asset has more accounting profit than taxable income, the excess will be taxed later.
For example, stocks that fall under "available for sale securities" are to be marked to market at the closing.
Valuation gain is not taxed until it is sold, but it is a profit under accounting rules and is naturally taxed at the time of sale.
It is the "deferred tax liabilities" that describes the provisional tax portion of the valuation gain at the time of preparing the balance sheet.
Interest–bearing debt is the debt that requires payment of interest.
Interest–bearing debt includes debt that requires interest payments, whether short–term or long–term debt.
Interest–bearing debt requires interest expense, but if a company can generate more profit than interest expense, it can be considered that the company was able to make effective use of the debt.
Interest expense is deductible, so it also has the benefit of tax savings, albeit slightly.
Therefore, it is general for companies to take advantage of interest–bearing debt.
As mentioned at the beginning, interest–bearing debt is debt that requires payment of interest.
Interest–bearing debt includes loans payable, commercial papers, bonds payable and lease obligations, both short–term and long–term.
Under Japanese GAAP, accounts with similar names are used regardless of the company, but in IFRS, accounts with various names are used depending on the company.
Under IFRS, loans payable, commercial papers and bonds payable are often grouped under accounts with names such as "Bonds and borrowings", or "Short–term debt" and "Long–term debt".
When calculating the amount of interest–bearing debt, the treatment of lease obligations is difficult for investors who are not familiar with accounting.
Therefore, this website uses the following formula to calculate interest–bearing debt.
This formula is not always accurate, but it can be used to calculate a approximate amount in most cases.
By the way, the following formula will be used to calculate interest–bearing debt on this website.
This formula is not always accurate for calculating interest–bearing debt, but in most cases it can give a reasonable amount.
Interest–bearing debts ≈ loans payable + commercial papers + Bonds payable + lease obligations (Japanese GAAP)
Interest–bearing debts ≈ Bonds and borrowings + lease liabilities (IFRS)
The reasons for using an inaccurate formula for calculating interest–bearing debt on this website are as follows.
If there is an error between the interest–bearing debt obtained by this formula and the exact interest–bearing debt, most of the cause is the lease obligation.
This is because lease obligations may or may not be counted as interest–bearing debt.
However, the ratio of lease debt to interest–bearing debt is usually small.
Therefore, even if an inaccurate amount is calculated by counting lease obligations in interest–bearing debt, the error is small.
Also, there are accounts that are included in interest–bearing debt other than those used in the formula, but in most cases the resulting error is smaller than the lease obligation.
In other words, unless the company has a high ratio of lease obligations to interest–bearing debt, the above formula will give an approximate amount of interest–bearing debt.
On this website, WACC and ROIC articles are related to interest–bearing debt.
In the WACC and ROIC calculations, interest–bearing debt is used in combination with shareholders' equity or market capitalization, so the effect of error is even smaller.
That is why this website use the above formula for interest–bearing debt.
However, some readers may want to know the exact amount of interest–bearing debt, so it will be described how to know the amount of interest–bearing debt of each company.
The description of "how to know" means that the content described below requires more effort than just calculation.
The easiest way to find out the exact amount of interest–bearing debt is to do an in–document search for "interest–bearing debt" in the securities report.
Some companies directly specify to the amount of interest–bearing debt in texts or tables.
If interest–bearing debt is not specified in the securities report, various efforts will be required depending on the company surveyed.
In the securities report of a company that adopts Japanese GAAP, A search for the letter "detailed schedule" will display tables named "Detailed schedule of bonds payable" and "Detailed schedule of borrowings".
There are various types of bonds such as corporate bonds and convertible bonds, but usually bonds payable require interest payment and all of them are included in interest–bearing debt.
The amounts of short–term and long–term loans payable, lease obligations, and other interest–bearing liabilities such as commercial paper are described in the "Detailed schedule of borrowings".
In the case of a company without lease obligations, the total amount of this "Detailed schedule of bonds payable" and "Detailed schedule of borrowings" is the interest–bearing debt.
On the other hand, in the case of a company with lease obligations, the lease obligations may not be counted as interest–bearing debts, so attention should be paid to the calculation of interest–bearing debt.
In a securities reports, text search with words such as "interest–bearing debt", "detailed schedule", and "lease obligations" may indicate in text whether or not the interest–bearing debt includes lease obligations.
In this case, the interest-bearing debt can be calculated according to the description.
However, unless otherwise stated, investors themselves need to confirm whether the company counts lease obligations as interest–bearing debt.
For companies that have adopted Japanese GAAP, the "Ratio of cash flow to interest–bearing debt" is stated in the earnings report.
The cash flow here is an operating cash flow, and the amount can be confirmed on the cash flow statement.
Therefore, if you calculate the "Ratio of cash flow to interest–bearing debt" with and without lease obligations based on the balance sheet or detailed schedule of borrowings, you can confirm the amount of interest–bearing debt of the company.
It is also possible to calculate an almost accurate interest–bearing debt by multiplying the operating cash flow by this "cash flow to interest–bearing debt ratio".
On the other hand, the securities report of companies that have adopted IFRS does not describe "Detailed schedule of bonds payable" and "Detailed schedule of borrowings".
In addition, since lease liabilities are included in accounts such as “other financial liabilities”, the amount is often unknown from the balance sheet.
So, first of all, by searching for the text of an account such as "other financial liabilities" in the securities report, you may be able to obtain the necessary information.
If you can find a sentence or table on whether to include lease liabilities in interest–bearing debt, you can calculate interest–bearing debt based on that information.
By the way, lease obligations are described as lease liabilities in IFRS.
If the securities report does not specify the amount or breakdown of interest–bearing debt, it is difficult for ordinary investors to determine whether to include lease liabilities in interest–bearing debt.
However, if lease obligations are not included in interest–bearing obligations, it is common to have a statement to that effect.
Therefore, unless the breakdown of interest–bearing debt is specified, it is better to interpret that lease obligations are included in interest–bearing debt.
That is, the same calculation as the above formula will be performed.
If you want the exact amount, you can contact the company directly.
The degree of accuracy required for interest–bearing debt depends on the reader.
This website uses the above formula to calculate interest–bearing debt.