To determine liabilities, you typically conduct a balance sheet analysis, focusing on the accounting equation:
Assets = Liabilities + Equity
From this equation, you can isolate liabilities as follows:
Liabilities = Assets - Equity
To calculate total liabilities, follow these steps:
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Identify Total Assets: List all assets and sum their values. This includes current assets (e.g., cash, accounts receivable, inventory) and non-current assets (e.g., property, equipment).
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Identify Total Equity: Determine the equity by summing the owner's equity or shareholder's equity, which typically includes common stock, retained earnings, and additional paid-in capital.
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Calculate Total Liabilities: Subtract the total equity from the total assets using the formula provided above.
Additionally, you can categorize liabilities into current liabilities (due within one year) and long-term liabilities (due after one year) if needed for further analysis.
Example:
- Total Assets: $500,000
- Total Equity: $300,000
Liabilities = $500,000 - $300,000 = $200,000
This tells you that the total liabilities amount to $200,000.
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