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Student loans are a type of debt that you incur to pay for your education.
When you borrow money to attend college or university, you are agreeing to pay back the amount borrowed plus interest. You usually have to start repaying your student loans when you graduate or drop out of school.
If you don’t pay back your loan on time, it’s considered a defaulted loan and the government can garnish your wages and seize other assets to recoup their losses.
what is liability
Liabilities
Liabilities are everything a business owes, now and in the future. They are found on the right side of a balance sheet. A common small business liability is money owed to suppliers i.e. accounts payable.
All businesses have liabilities, unless they exclusively accept and pay with cash. Cash includes physical cash or payments made through a business bank account.
There are two types of liabilities: current and long-term liabilities. Current liabilities need to be paid back within a year and include credit lines, loans, salaries and accounts payable. Many company expenses are current liabilities.
Long-term liabilities can be paid back after a year and include mortgages and bonds.
are student loans considered liabilities
Liability is a fancy word for debt, or something that you owe. Once you know your total liabilities, you can subtract them from your total assets, or the value of the things you own — such as your home or car — to calculate your net worth.
Liabilities are a part of your overall financial health, but they might not be harmful as long as you keep them in check. Here’s what you should know.
What are some examples of liabilities?
A liability is money you owe to another person or institution. A liability might be short term, such as a credit card balance, or long term, such as a mortgage. All of your liabilities should factor into your net worth calculation, says Jonathan Swanburg, a certified financial planner in Houston. Examples include:
- Auto loans.
- Student loans.
- Credit card balances, if not paid in full each month.
- Mortgages.
- Secured personal loans.
- Unsecured personal loans.
- Payday loans
long term liabilities
Long-term liabilities (long-term debts)
Long-term liabilities, also called long-term debts, are debts a company owes third-party creditors that are payable beyond 12 months. This distinguishes them from current liabilities, which a company must pay within 12 months.
On the balance sheet, long-term liabilities appear along with current liabilities. Together, these represent everything a company owes. Payment of these debts is mandatory.
Because long-term liabilities are payable beyond 12 months—often for many years—companies tend to use them to finance assets that are also enduring in nature, such as land, buildings and equipment. Payment and other details of these debts are found in the notes to the financial statements included with the balance sheet.
Assets vs. Liabilities: The Complete Breakdown
If you’re like many business owners, you know that you have to handle certain tasks, like purchasing items, taking on debt, or putting your own money into your business, to get your venture up and running. And when your company processes any type of transaction, whether it’s debt, purchases, etc., you have to record it in your books. This is where accounting assets vs. liabilities come into play. To get a solid understanding of the difference between assets vs. liabilities, keep reading.
Assets vs. liabilities overview
What is the difference between assets and liabilities? To understand how the two differ, you have to know the liability vs. asset meaning:
- Liabilities: Existing debts a business owes to another business, vendor, employee, organization, lender, or government agency. Liabilities can help owners finance their companies (e.g., loans).
- Assets: Items or resources of value that the business owns. Assets can generate revenue and provide long-term benefits to the owner (e.g., property).
Both assets and liabilities are on the balance sheet, which is one of the three main financial statements for businesses.
Examples of liabilities
Liabilities can be short- or long-term. Typically, short-term liabilities are known as current liabilities. And, long-term liabilities are called noncurent liabilities.
Examples of current liabilities include:
- Short-term debts (e.g., credit card balances)
- Tax liabilities (e.g., payroll taxes)
- Accrued expenses (e.g., received goods you purchased but have not received an invoice yet)
- Accounts payable (i.e., unpaid invoices)
Here are a few examples of noncurrent liabilities:
- Loans lasting more than a year (e.g., mortgage loans)
- Deferred tax payments
- Other noncurrent liabilities (e.g., leases)
You must pay short-term liabilities within one year of incurring the debt. Long-term liabilities include debts you pay over a period that is longer than a year.
Examples of assets
Like liabilities, businesses can have current and fixed assets (aka noncurrent assets). A current asset is a short-term asset, while noncurrent assets are long-term.
Examples of current assets include:
- Investments
- Inventory
- Cash and cash equivalents (e.g., checking accounts)
- Accounts receivable (aka unpaid invoices from customers)
Current assets can be converted into cash quickly, typically under one year. Another common term for current assets is short-term investments.
Examples of noncurrent assets include:
- Property (e.g., buildings or cars)
- Equipment
- Patents or trademarks
Noncurrent assets are also known as fixed assets. They provide long-term, continual value to a business. But, businesses cannot convert fixed assets into cash within one year. Long-term assets typically depreciate in value over time (e.g., company cars).
Assets can also be tangible or intangible. Tangible assets are physical items that the business owns. These types of assets easily convert to cash. Physical assets include items such as inventory, equipment, and bonds.
Intangible assets are nonphysical items that do not easily convert to cash. Examples of intangible assets include logos, trademarks, patents, and business licenses.
Assets, liabilities, and more go into setting up your books.
Learn all about how to set up your books the right way. Download our FREE whitepaper, How to Set Up Your Accounting Books for the First Time, for the steps, tips, and a handy checklist.
Assets vs. liabilities examples
There is some overlap between assets and liabilities because you can use a liability to purchase an asset. To fully understand the difference, take a look at some asset vs. liability examples.
Example 1
Your business grows and you weigh the pros and cons of leasing vs. buying commercial property. After examining your books, you decide to purchase property.
The property you purchase is a long-term asset that you can grow in value over the years you own it. The cost of the property is spread out over time instead of one year.
On the other hand, the mortgage for the property is a liability in your books. The mortgage loan is a long-term debt you owe to a lender.
Example 2
Say you decide to lease a car for your employees to use on official business. Is the car an asset? No. The car is not your property because it is not a purchase.
Instead, a leased vehicle is a liability for the business even though the business has temporary possession of the car. Payments for the lease increase expenses for the business but do not provide an item of value to the business’s bookkeeping.
Example 3
Let’s say you decide to purchase the leased vehicle when the lease term is up. You need to take out an auto loan to finance the purchase of the car.
When you purchase the vehicle, it becomes an asset you record on your balance sheet. And, the auto loan is a new liability you record, too.
Why is the auto loan a new liability? When the lease term is done, the liability is complete because you paid the entirety of the lease. Signing an auto loan creates a new debt for the business.
Example 4
Say you choose to use funds from your business to purchase the leased vehicle at the end of the lease term. By using your business funds, you do not have to take out an auto loan.
The vehicle becomes an asset at the time of purchase. Because there is no loan, you do not incur a liability. Instead, the purchase is an expense.
Assets vs. liabilities vs. equity
Now that you know the difference between assets vs. liabilities, it’s time to understand the role of equity in the accounting equation. Equity is the:
- Amount the business owner or stockholders invest in the company
- Value of the company
Equity is a crucial part of the business’s relationship between assets and liabilities.
On a balance sheet, assets equal the total liabilities plus the total equity. If they don’t balance, you need to find and fix the discrepancy. There are several ways to look at the equation:
Equity = Assets – Liabilities
Assets = Liabilities + Equity
Liabilities = Assets – Equity
The accounting equation shows business owners and their financial advisors if the business uses its own funds or finances through debt. Only companies that use double-entry bookkeeping should use the accounting equation.
Equity has an equal effect on both sides of the equation. If a business has only two parts to the equation (e.g., equity and assets), it can calculate the third amount with ease.
In conclusion, student loans are not considered liabilities. While they may be debts that need to be paid off over time, they are not the same as other types of debt. Student loans are often used to fund activities that have positive social and economic benefits, such as helping people get an education. This means that student loans are not liabilities in the same way as other types of debt.
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