Liabilities: debts come in different kinds

STEP 1A liability is an obligation to repay in the future

Hearing the word liability, you probably think of bank loans first. But in accounting, liability is a broader term. Let's pin down the definition precisely first.

A liability is 'other people's money' and a 'promise to repay'

On the balance sheet, a liability is an obligation to hand over money, goods, or services to someone else in the future because of a past transaction. It isn't only money borrowed from a bank. If you bought flour on credit and haven't paid yet, that unpaid bill is a liability, and if a customer paid for a cake in advance and you haven't made it yet, that deposit is a liability too. They have one thing in common: they are promises that end only when you hand something over.

Recall the scale picture from Lesson 6. Assets of KRW 10 billion were funded with someone's money; of that, KRW 4 billion of liabilities is other people's money that must be repaid and KRW 6 billion of equity is the shareholders' money. So more liabilities means the same assets are propped up by more of other people's money.

Split into two boxes by a one-year cutoff

Just as assets are split into current and non-current, liabilities are also split using one year as the cutoff. A liability that must be repaid within one year of the reporting date is a current liability, and one that may be repaid after that is a non-current liability. Laying out Robin Bakery's (fictional) liabilities by this rule gives the following.

Robin Bakery is a fictional company created for this course. The breakdown of the detailed items is also an educational assumption.

The reason we look at current liabilities separately is that they're 'money going out soon'. If KRW 2 billion must be repaid within a year and current assets convertible to cash within a year are KRW 3 billion, there's breathing room. This comparison is the current ratio you'll learn in Lesson 10 (30 ÷ 20 = 150%).

STEP 2Debt that pays interest, debt that comes from doing business

Current vs. non-current tells you 'when' it's repaid. The more important question for an investor is 'what kind' of debt it is. Start by separating out the debt that carries interest.

Debt that pays interest: borrowings and bonds payable

Interest-bearing debt is, literally, debt on which interest must be paid. Typical examples are borrowings from banks and bonds payable (corporate bonds) that the company issues to borrow from investors. This debt accrues interest over time, and at maturity the principal must be repaid in a lump sum or borrowed again (refinanced). Refinancing in a period of rising rates makes the interest much more expensive. Robin Bakery's interest-bearing debt is KRW 2.1 billion, the sum of KRW 600 million of short-term borrowings and KRW 1.5 billion of long-term borrowings.

Debt from doing business: trade payables and advances received

Trade payables are the price of raw materials bought on credit and not yet paid. A bakery usually pays the flour company about a month later, and in the meantime that money is recorded as a liability. It carries no interest, and as long as the business continues, it is a 'revolving' debt that arises again once repaid. In fact, being able to pay suppliers later can also mean the company has bargaining power.

Advances received are more interesting. If a customer pays for a Christmas cake in advance, the company has received the money but not yet handed over the cake, so a liability arises: the 'obligation to deliver the cake'. This liability is not paid off with money; it disappears when the cake is delivered, and at that moment it becomes sales. So a rise in advances received can be a signal that orders that will become sales are piling up. It is an especially important number in industries such as shipbuilding and construction that receive payment in advance.

Two more worth knowing: lease liabilities and provisions

A company that rents its stores calculates the future rent payments at present value and records them as a lease liability. Because of the accounting standard applied since 2019 (K-IFRS 1116), the liabilities of retail, restaurant, and airline companies with many stores look much larger. It is not borrowed money, but it is money that must be paid, so many analysts treat it as close to interest-bearing debt. A provision is a liability set aside in advance for money that is likely to go out even though the amount or timing is uncertain. Product warranty repair costs and damages likely to be lost in a lawsuit are examples.

See it in a picture: sort Robin Bakery's liabilities

Tap one item at the top, then tap the right basket below. When all six items are in, the totals per basket appear.

STEP 3Calculating the interest burden and reading liabilities in DART

Once you've picked out the interest-bearing debt, it's time to measure in numbers how much it eats into profit. When interest rates change, the weight of the same debt changes too.

Interest expense comes out of operating profit

Think of the income statement staircase: a company pays interest expense out of the operating profit earned from its core business, then pays tax on the rest and keeps net income. Assuming Robin Bakery (fictional) pays an average of about 4.8% a year on its KRW 2.1 billion of interest-bearing debt, its one-year interest expense is about KRW 100 million. The 'non-operating items −KRW 100 million' in the Lesson 1 summary table is exactly this interest expense. It pays KRW 100 million of interest out of KRW 1.5 billion of operating profit, so it has room to cover the interest 15 times over. This multiple is called the interest coverage ratio, covered in detail in Lesson 10.

The problem is interest rates. In Learn (Economics) Lesson 12 you learned that when the rate on a KRW 100 million loan rises from 3% to 5%, annual interest grows from KRW 3 million to KRW 5 million. Companies are no different. A company with lots of floating-rate loans, or with loans about to mature that must be borrowed again, sees interest expense rise right away when rates rise. This is why, in Learn (Economics) Lesson 18, heavily indebted construction and REIT stocks were weak during rising-rate periods.

See it in a picture: how much does interest grow when rates rise?

Move the average interest rate. It shows the one-year interest expense on KRW 2.1 billion of interest-bearing debt next to operating profit. Press 'If a downturn hits too' to see operating profit cut in half.

Find it yourself in DART: liabilities sit right below assets

The order is the same in a real report. Let's reopen the consolidated balance sheet of the business report we opened in Lesson 3. The screen below is a large listed company's business report (filed 2025.03.11), shown only as an example of finding your way, not an investment recommendation.

1234

• 1In the document contents, expand III. Financial Matters.
• 2Open 2-1. Consolidated balance sheet and assets come first; scroll down and you'll see liabilities → current liabilities → non-current liabilities → total liabilities, followed by equity below.
• 3Be sure to check the unit. This report is in KRW million, so '1,000,000' is KRW 1 trillion.
• 4The (Note ○○) next to an item is a note number. Follow the note number beside the borrowings and bonds lines and you'll find the interest rates, maturities, and collateral laid out in tables.

Source: FSS DART, business report III-2-1 consolidated balance sheet screen (captured 2026-10). Unit: KRW million.

On the liabilities side, first find and add up the lines with interest-bearing names, such as short-term borrowings, current portion of long-term debt, bonds, and long-term borrowings. Then check in the borrowings note whether the rate is fixed or floating and when maturities are bunched. If maturities cluster within one to two years and rates are rising, interest could rise sharply when the company borrows again. Obligations not yet fully booked, such as lawsuits and payment guarantees, are checked in the contingent liabilities note you saw in Lesson 5 and in Chapter XI of the annual report.

How to use it in investing

Not always. The normal debt structure differs by industry. For a bank that takes deposits and lends, liabilities are the business itself, and some industries carry large advances received. Compare among companies in the same industry, and across several years. This lesson does not recommend buying or selling any particular stock.