Financial liabilities, a fundamental concept in your business accounting
If you are thinking of starting a business, or have already embarked on an adventure, you will have realized that there are financial concepts that it is essential to understand and handle well to guarantee the success of your idea. And you are not going to get very far if you do not organize your business accounting well , no matter how well your project is planned. Therefore, this time we are going to see in more detail what financial liabilities are .
Financial liabilities, what are they?
Financial liability is just the opposite of financial asset. If the latter is what makes up the assets of our business (the place where we carry out the activity, the machinery, shares, etc.), the liabilities are obligations and debts that we have contracted with others , whether natural or legal persons, and that we owe pay at a specific time.
But these liabilities are not always covered with money , in many cases we can settle the liabilities with tangible or intangible assets. For example, we may assign shares in our company to a third party in exchange for the money they have lent us.
Types of financial liabilities
- Financial liabilities held for trading : we issue them to reacquire them in the short or medium term.
- Derivative financial liability : they appear as a result of an agreement that is based on the exchange of assets under the agreed conditions.
- Financial liability at fair value : they arise by eliminating accounting asymmetries, when assets and liabilities are valued at the accounting close of a year.
Valuation of financial liabilities
The usual thing is to reflect the liabilities in the accounting according to the value that is reasonable for the consideration received . However, as some liabilities may involve the payment of interest, for accounting purposes financial liabilities may be reflected at amortized cost .
Examples of financial liabilities
- Non-voting shares.
- Debts with individuals.
- Obligations and marketable securities that we have issued, such as bonds and notes.
- Loan contracts.
In addition, there are other financial liabilities such as the contractual obligation to deliver assets under conditions that are unfavorable for us, which can happen if we have to transfer it at a lower price than the current one or at its cost price.
Is it bad to have financial liabilities?
When it comes to debt, we all want to get rid of it as soon as possible. But in the business world, indebtedness is normal and does not necessarily have to be negative . The important thing is that you are able to manage assets and liabilities well and that the latter never exceed the former.
So at the time of contracting a debt make sure that you really have enough assets to be able to pay it. If you do good management and forecasting of financial liabilities, your business can become very profitable.
Financial and accounting terms are somewhat complex, but it is important to delve into them in order to better understand the financial situation of our business and manage it well.
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