The liabilities side shows the source of the capital. It records equity, provisions, liabilities, and, if applicable, deferred income as well as deferred tax liabilities. The liabilities show where or to whom the company owes something and what the owner is entitled to.
On this side, maturity is important. Stockholders’ equity is regarded as long-term capital that remains in the company for a long time, with other long-term liabilities such as mortgages and bank loans listed below. The situation is different for short-term liabilities, such as supplier invoices – these are usually settled within a few days and therefore are positioned lower than long-term liabilities.
Provisions are liabilities whose value isn’t yet determined: These include taxes, pension payments, and anticipated litigation costs from pending proceedings.
Accruals/prepayments result from payments that occurred at a different time than when the service was used. On the assets side, an example of this would be advance rent payments, say if the rent for January and February was paid in December of the previous year (prepayment). On the liabilities side, examples would be services that were invoiced in advance but not rendered until the following financial year, such as advances (accrual).
Generally speaking, the creation of a balance sheet and income statements requires a certain amount of expert knowledge. Though you’re certainly not required to, it’s advisable to hire a tax consultant to prepare your annual financial statements – not least because you can avoid any costly corrections at a later date, but also because both the tax authorities as well as banks appreciate preparation by an independent third party.