Are liabilities always a bad thing?
Liabilities are obligations and are usually defined as a claim on assets. However, liabilities and stockholders’ equity are also the sources of assets. Generally, liabilities are considered to have a lower cost than stockholders’ equity. On the other hand, too many liabilities result in additional risk.
Some liabilities have low interest rates and some have no interest associated with them. For example, some of a company’s accounts payable may allow payment in 30 days. With those payables it is better to have the liability and to keep your cash in the bank until they become due.
In our personal lives, our first house was probably purchased with a down payment and mortgage loan. That mortgage loan was a big liability, but it allowed us to upgrade our living space. I viewed my mortgage loan liability as a good thing because it allowed me to own a nice home in a beautiful neighborhood.
So some liabilities are good—especially the ones that have a very low interest rate. Too many liabilities could cause financial hardships.
Learn more about the Balance Sheet.
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i would like to add some questions and i hope it can be posted in the Q&A portion: What account that are not seen in the income statement and balance sheet but can be viewed in the notes of financial statements.
“Are liabilities always a bad thing?â€
Thanks to financial leverage, using liabilities as a type of asset financing can get our return on own capital higer for all time in which the interest rate on borow capital is below the ROCE-return on total capital employed…
Liabilities are a source of capital,capital which is cheaper than equity capital.A company should have a combination of both to maximize returns of stockholders wealth
With an example,How to record the entries in cost accounts for the year and its trial balance?
Thanks for the questions
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