On a personal balance sheet, liabilities cover elements as diverse as short-term loans and medium-term debts to long-term borrowings. Pay attention to your balance sheet and its components, because this report says a lot about your financial condition and ability to repay outstanding loans, whether they're due within three months or 20 years.
A short-term liability is a loan you must repay within 12 months, and this is the cutoff accountants use to set short-term debts apart from long-term liabilities. "Liability," "financial obligation" and "debt" are synonyms, and these terms apply to any transaction in which you receive money from a creditor and agree to repay at a later date. Some loan covenants -- this is another name for loan agreements -- may specify that you settle a short-term debt through periodic installments, such as monthly or quarterly payments. Short-term debts include funds tapped on credit cards, taxes due and utilities.
Long-term liabilities are loans with a longer repayment window, and a borrower generally settles them over several years. Think about things such as mortgages, student loans, car loans and the like. Although a debtor repays a long-term loan over a period that exceeds one year, lenders continually review the borrower's economic standing to prevent short-term financial tedium from metastasizing into a long-term monetary problem. For example, creditors check such elements as creditworthiness and employment status to make sure borrowers will have enough money to repay long-term loans.
Aside from liabilities, a person's balance sheet shows assets, which are resources the individual relies on to meet operating or lifestyle goals. Personal assets include money you have in the bank or stashed under the mattress, a car or house on which you owe no money, cash in your retirement accounts and marketable securities. The latter includes things such as stocks and bonds, which you can buy and sell through brokerage companies. As a stockholder, you're entitled to periodic dividends, and you also can make more money if the stock's price increases. If you own bonds -- which are debt products -- you receive periodic interest payments during the bond term and the principal amount at the maturity date, which is what accountants call the date a borrower must repay the full loan amount.
Personal Finance Implications
Delving into your personal balance sheet periodically is an effective practice, but heed other accounting reports to understand what's going on in your personal finances. These accounting statements include a statement of cash flows and a report on profit and loss. In the former statement, you explain how you made money during a given period and how you spent it. In the latter report, you report your disposable income at the end of the reporting period, meaning how much you have left after taking care of all personal expenses.
- The Free Dictionary by Farlex: Balance Sheet
- AccountingCoach; Balance Sheet; Harold Averkamp
- Personal Finance 101: How to Effectively Set and Track Goals
- Walden University: How to Calculate Debt to Loan Ratio
- State of New Jersey Department of Banking and Insurance: Personal Finance -- Frequently Asked Questions
- Brigham Young University: Can I Meet My Debt Obligations?