Definition of Average Total Liabilities in Accounting

Investors admire corporate executives who recognize early the severity of liquidity problems and use strategically sensible tools to stem monetary issues, spur fundraising efforts and cultivate better relationships with creditors, regulators and financiers. To improve corporate operating activities, business leaders heed various metrics, including solvency ratios, liquidity factors and the accounting average of total liabilities.

Investors admire corporate executives who recognize early the severity of liquidity problems and use strategically sensible tools to stem monetary issues, spur fundraising efforts and cultivate better relationships with creditors, regulators and financiers. To improve corporate operating activities, business leaders heed various metrics, including solvency ratios, liquidity factors and the accounting average of total liabilities.

Definition

To calculate a company's average total liabilities during a given period, take its debt amounts at the beginning of the period, add them to how much the business owed at the end of the period and divide both numbers by 2. The time frame may be one week, month, quarter or fiscal year -- what matters most is the objective of the study. For example, a company has $1 million in debt at the beginning of the year, and the liabilities ledger reflects the rosy year the business had -- showing a final amount of $500,000 on Dec. 31. The company's average total debt equals $750,000, or $1 million plus $500,000 divided by 2.

Bookkeeping and Operational Reporting

Before financial managers and department heads can use debt numbers in strategic discussions, various personnel work diligently to make sure corporate liability information has a ring of accuracy to it. Bookkeepers follow specific procedures to record debt proceeds, generally by debiting the cash account and crediting the corresponding liability account. In accounting terminology, debiting cash -- an asset account -- means increasing company money. Under accounting rules, a bookkeeper debits a liability account to reduce its amount and credits the account to increase its worth. Total liabilities are integral to a company's statement of financial condition, which is the same as a balance sheet or report on financial position.

Solvency Considerations

It's no secret that a company with a high debt pile and poor creditworthiness typically has a frosty relationship with business partners of all stripes, including lenders, investors, vendors and service providers. Ideally, the organization's executives calculate average total liabilities for many reasons, such as figuring out how much the business owes and finding smart ways to ease creditor anger, reassure suppliers and raise operational funds to plug budget gaps.

Financial Ratios

To get a clearer idea of a company's finances, accounting supervisors use various metrics that closely align with -- or directly come from -- the organization's average total debt number. Examples include working capital and debt-to-equity ratio. Working capital evaluates how much money a corporation will have in the next 12 months. The metric equals short-term assets minus short-term liabilities. Debt-to-equity indicates an organization's vulnerability to risk and equals total liabilities divided by corporate equity capital.

References

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.