- The balance sheet lists the liabilities of a company,
obligations that will require probable future sacrifice,
either by paying assets or by delivering some service.
Let's talk about some examples.
We'll start with Walmart and the company's accounts payable.
The word payable is a hint there.
A payable is an obligation to pay in the future.
When Walmart buys inventory,
the company promises its suppliers,
Procter & Gamble or BLACK+DECKER or whomever,
that they will pay in the future, that's an obligation.
Walmart had better write down that accounts payable amount.
Walmart should not just write down,
hey, we just bought some inventory from Procter & Gamble.
The company had also better write down, oh yeah,
and we owe them for it, we've got to pay them later.
The insight of the accounting equation is
that you've got to write down the asset, the inventory,
in this case, and you also write down
how you bought the asset, in this case,
you promised to pay later.
Accounts payable is a good example of a liability.
Home Depot and Target and Walmart,
and almost every other business in the world,
requires their employees to work
for a few weeks and then they pay them.
If Home Depot or Walmart or Target were
to do a balance sheet at the end of any given day,
they would be required to write down wages payable.
How much have our employees earned
that we haven't paid them yet?
Wages payable is another example of a liability.
The same thing works for taxes.
Taxes build up slowly over time.
If you prepare a balance sheet, you better write down,
okay, as of today, here's how much tax we owe
that we haven't paid yet.
ExxonMobil, for example, does a lot of accounting for taxes.
They pay taxes of all sorts around the world.
They pay property taxes, they pay income taxes,
they pay sales tax, they pay import/export fees,
all kinds of taxes, and of course,
they don't pay these taxes in cash at the end of every day.
When ExxonMobil prepares a balance sheet,
the company has to list out the taxes that they owe
as of the balance sheet day.
Disney has some long-term debt on their balance sheet.
Long-term debt means money that they have borrowed
that they're going to pay back sometime far into the future,
five years from now, 10 years from now, 20 years from now.
Long-term borrowing is an important way
to get money to buy assets.
Now, here is an interesting example of a liability.
Think about the last time you flew
on United Airlines or Delta Airlines
or American Airlines, or any other airline.
Did you pay for your flight before you flew
or after you flew?
Well, the airlines always make you pay before you fly.
If you've paid for a flight and you haven't taken it yet,
the airline has an obligation
to give you a ride on an airplane.
This liability is called unearned revenue.
For United Airlines, last time I looked,
this number was $3.9 billion.
United had collected $3.9 billion from people like you
and me, and hadn't yet given them rides on airplanes.
Of course, United had better keep track of that obligation.
Liabilities are obligations that will require
probable future sacrifice, either by paying assets
or by delivering some service.
So one important way that companies acquire assets is
by accepting obligations in exchange
for receiving those assets.