## How to calculate days sales outstanding, any example?

Meaning of days sales outstanding Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables isRead more

## Meaning of days sales outstanding

Days sales outstanding (DSO) refers to the average number of days the receivables from credit sales remain outstanding in the books of accounts before they are converted to cash. A high DSO portrays that the time interval between credit sales and cash receivables is very long and might lead to problems in the cash flow of the company while on the other hand, a low DSO shows that the company is able to collect the amount in fewer days. It is important to note here that the formula for DSO is applicable only in relation to the credit sales of the company.

The formula to calculate days sales outstanding is as follows:

DSO can be calculated on a monthly, quarterly, or yearly basis depending on the terms of the company.

# Example

XYZ Ltd. made credit sales amounting to 7,00,000 in October, out of which 4,00,000 are yet to be received. As there are 31 days in October, the DSO for XYZ Ltd. shall be calculated as follows:

DSO = Accounts receivables/ Total credit sales x No. of days

= 4,00,000/7,00,000 x 31

= 17.7 days

In my opinion, 17.7 days is a low average turnaround for a company to collect cash from accounts receivables in a month and hence portrays a good DSO however, it varies from company to company what they consider to be a high or low DSO.

Hope this helps.

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## What is the Journal Entry for Cash Deposit in Bank?

1. Every entity deposits its idle cash in its bank account. Depositing cash in the bank account will fetch interest to the entity and also ensure safety of the money. Cash deposit in the bank is one of the most recurring transactions in every entity’s day-to-day business activity. So, it is important tRead more

Every entity deposits its idle cash in its bank account. Depositing cash in the bank account will fetch interest to the entity and also ensure safety of the money. Cash deposit in the bank is one of the most recurring transactions in every entity’s day-to-day business activity. So, it is important to know the journal entry for the same.

## Journal Entry for Cash Deposit in Bank

I will present the journal entry using both the golden rule and the modern rule of accounting.

1. According to the “Golden rules” of accounting

 Bank A/c Debit Personal account Debit the receiver To Cash A/c Credit Real account Credit what goes out

(Being cash deposited in the bank)

2. According to the “Modern rules” of accounting

 Bank A/c Debit Asset Debit the increase in asset To Cash A/c Credit Asset Credit the decrease in asset

(Being cash deposited in the bank)

Example

Sugar Ltd has idle cash 500,000. The finance manager deposited the idle amount in the company’s Bank of America A/c.

Journal entry in the books of Sugar Ltd will be as follows-

 Bank of America A/c Debit 500,000 Debit the increase in asset To Cash A/c Credit 500,000 Credit the decrease in asset

(Being Cash deposited in Bank of America A/c)

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## How to calculate provision for discount on debtors?

Provision for Discount on Debtors The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the neRead more

## Provision for Discount on Debtors

The entity in order to encourage its customers to make a prompt payment allows a discount to its customers purchasing goods on credit. Thus, when the sales are made in the current reporting period on a credit basis the then the discount needs to be allowed in the next reporting period if such customer makes the payment promptly.

The discount allowed reduces the revenue of an entity and hence, it can be said that provision for a discount is expected loss for an organization and so it needs to be given effect in the current accounting period.

## Calculation of Provision for Discount on Debtors

 Particulars Amount Debtors XXXXX Less: Bad Debts (XXXX) XXXXX Less: Provision for Bad and Doubtful Debts (XXXX) Good Debts XXXXX Less: Provision for discount on debtors (Estimated % of Good Debts.) (XXXX) Debtors (Amount to be Shown in the Balance Sheet) XXXXX

This can also be explained with the help of an example.

Illustrative Example

Calculate Debtors Balance to be shown in the Balance Sheet

• An Entity has debtors worth 50,000
• Bad debts throughout the year worth an amount of 4000
• It has created a reserve for bad and doubtful debts at the end of the year worth 1000
• The provision for discount on debtors is estimated to be 10%.

Solution:

 Particulars Amount Debtors 50,000 Less: Bad Debts (4,000) 46,000 Less: Provision for Bad and Doubtful Debts (1,000) Good Debts 45,000 Less: Provision for discount on debtors (45,000 X 10/100) (4,500) Debtors (Amount to be Shown in the Balance Sheet) 40,500

Aastha.

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## Is purchase return a debit or credit?

Purchase return is credited in the books of accounts. To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship. Rules of accounting To apply these rules of accounting we first need to analRead more

Purchase return is credited in the books of accounts.

To make the concept simpler, I would like to introduce you to the Golden and Modern rules of accounting, which are designed to explain the debit and credit relationship.

# Rules of accounting

To apply these rules of accounting we first need to analyze the type of account in question. An account is said to be nominal when it is related to the incomes, gains, losses, or expenses of a business. The goods purchased on a cash/credit basis by the business are returned to the seller which in turn reduces the accounts payables and is a gain for the organization, hence purchase returns is a nominal account.

Golden or the traditional rules of accounting

Firstly, we shall consider the golden rules of accounting for a nominal account to determine why purchase return a/c has a credit balance. The rule is as follows:

“Debit all expenses and losses,

Credit all incomes and gains.”

Example

ABC Ltd. purchased raw materials from a supplier worth 60,000 on a cash basis. After complete scanning, some defects were identified and the company decided to return the damaged materials worth half of the total value. The journal entries in the books of ABC Ltd. are as follows:

 Purchase a/c Debit 60,000 Debit all expenses and losses To cash a/c Credit 60,000 Credit what goes out

(being goods purchased from the supplier)

 Cash a/c Debit 30,000 Debit what comes in To Purchase return a/c Credit 30,000 Credit all incomes and gains

(being goods returned to the seller)

Note: A debit of 60,000 in the Purchase a/c and a credit of 30,000 in Purchase return a/c portrays that ABC Ltd. had a net purchase of 30,000. (60,000 – 30,000)

Modern rules of accounting

The modern rule is as follows:

 Type of account Debit Credit Expense account Increase Decrease

Example

XYZ Ltd. purchased goods from Mr. A, for 40,000 on a credit basis. Due to a lack of quality goods worth 10,000 were returned. The journal entries in the books of XYZ Ltd. are as follows

 Purchase a/c Debit 40,000 Debit the increase in expenses To Mr. A’s a/c Credit 40,000 Credit the increase in liability

(being goods purchased on credit basis)

 Mr. A’s a/c Debit 10,000 Debit the decrease in liability To Purchase return a/c Credit 10,000 Credit the decrease in expenses

(being goods returned to the supplier)

Note: A debit of 40,000 in the Purchase a/c and a credit of 10,000 in the Purchase return a/c shows that XYZ Ltd. had a net purchase worth 30,000. (40,000 – 10,000)

Hope this helps.

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## What is the journal entry for trade discount?

1. In a layman’s language, a trade discount refers to a reduction/fall in the original price of a commodity. This type of discount is usually granted on the list price of the products by the supplier or wholesaler to the retailer for considerations such as buying goods in bulk, trade relations, etc. NoRead more

In a layman’s language, a trade discount refers to a reduction/fall in the original price of a commodity. This type of discount is usually granted on the list price of the products by the supplier or wholesaler to the retailer for considerations such as buying goods in bulk, trade relations, etc.

No journal entry is recorded separately in the books of accounts for trade discounts. The entries that are shown in the sales or purchase books are recorded as the net amount.

This type of discount is simply utilised to determine the net amount for a customer. Since the trade discount is deducted before any exchange takes place, it does not have any accounting entry.

## Example

A distributor sells goods to Mr. U amounting to the list price of 8,000 and offers a trade discount of 10% as the customer purchased goods in bulk. The net price will be calculated as follows:

List price = 8,000

Net amount = 8,000 – (8,000 x 10%)
= 8,000 – 800
= 7,200.

The journal entry in the books of the distributor is as follows:

 Cash a/c Debit 7,200 Debit the increase in asset To  Sales a/c Credit 7,2000 Credit the increase in revenue

(being goods sold)

The journal entry in the books of Mr. U is as follows:

 Purchase a/c Debit 7,200 Debit the increase in expenses To  Cash a/c Credit 7,2000 Credit the decrease in asset

(being goods purchased)

Note: The seller as well as the buyer will record the transactions in the books of accounts after subtracting the trade discount allowed from the original amount. As shown in the example above, both the distributor and Mr. U shall record the transaction at 7,200. No separate entry shall be shown for trade discount.

Hope this helps.

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## What is another name for balance sheet?

Another name of Balance Sheet- There are several names given to the balance sheet such as- Statement of financial position, Statement of financial affairs, Net worth statement etc., In American history balance sheet was referred by various other names such as- Treasurer Reports, Financial StatementsRead more

# Another name of Balance Sheet-

There are several names given to the balance sheet such as- Statement of financial position, Statement of financial affairs, Net worth statement etc., In American history balance sheet was referred by various other names such as- Treasurer Reports, Financial Statements, Statement of Assets and Liabilities, Consolidated Balance Sheet and Condensed Financial Statements.

Apart from all the above-mentioned names, the two most popular names of Balance Sheet are- Statement of financial position and Statement of Assets and Liabilities.

To make the concept clear, I would like to add logic behind the different names of the balance sheet followed by a snippet of a practical example.

## Statement of Financial Position-

The balance sheet is called as a statement of financial position because it shows financial stability, liquidity and performance of the business. This statement helps the business to define its future financial goals.

Analyzing the statement of financial position would help the users of financial data (both internal and external users) to forecast the period, value and volatility of the organization’s future earnings.

## Statement of Assets and Liabilities-

The balance sheet is also known as the statement of assets and liabilities because it portraits what entity owns (Assets) and owes (Liabilities) along with the amount invested by the owner (or) shareholders in the form of capital for a specified period.

The logic behind this name states that there should be a balance between total assets and total liabilities along with the owner’s equity. Hence a sound organization’s financial statements must always be balanced.

Assets = Liabilities + Owner’s Equity

Practical Example-

The following are the balances of ABC Enterprises. Prepare Balance Sheet.

 Particulars Amount Particulars Amount Capital 14,00,000 Sundry Debtors 4,00,000 Plant & Machinery 8,00,000 Bills Payable 2,00,000 Sundry Creditors 6,00,000 Bills Receivable 4,00,000 Land & Building 10,00,000 Bank Loan 4,00,000

Balance Sheet of ABC Enterprises-

Balance Sheet has 3 main components– Liabilities, Assets and Net Worth

Liabilities- It refers to the debts owed by the organization which are needed to the paid before the entity is legally wound up. They are classified into two types- Current and Non- Current Liabilities. Bank Loan, Sundry Creditors, Bills Payables are its few examples.

Assets- It refers to the economic resources owned and controlled by the organization for deriving long-term future benefits. They are classified into two types- Fixed and Current Assets. Land & Building, Sundry Debtors, Bills Receivables are its few examples.

Owner’s Equity- It refers to the amount introduced (or) invested by the owner at the time of starting the business. This amount remains in the business until the entity is legally wounded by the law. Owner’s Equity is also known as capital (or) net worth.

Owner’s Equity = Assets – Liabilities.

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## Is investment an asset?

Yes, investments are assets. First, let me familiarize you with the meaning of the term investments in order to understand its nature. Meaning of Investments Investments are assets or resources owned and controlled by entities. They provide future economic value to entities. They are held with an inRead more

Yes, investments are assets.

First, let me familiarize you with the meaning of the term investments in order to understand its nature.

## Meaning of Investments

Investments are assets or resources owned and controlled by entities. They provide future economic value to entities. They are held with an intention to generate additional income or to benefit from the appreciation in value over time.

Examples of investments
1. Investment in Mutual funds
2. Investment in Government securities
3. Investment in Debentures & Bonds
4. Acquiring Shares of companies
5. Acquisition of Land & Building to earn rentals or for capital appreciation
6. Investment in Subsidiaries, Associates, and Joint Venture

Analyzing the meaning of investments itself, we can conclude that investments are assets for entities acquiring them.

## Presentation of Investments in Financial Statements

1. Long-term Investments

Investments that are held for more than a period of 1 year are termed as Long-term Investments.

Examples

a. Investment in Real Estate to earn rentals or for capital appreciation
b. Purchase of Debentures or Corporate/Government Bonds having a maturity period of more than a year
c. Investment in Subsidiaries, Associates or Joint Venture

Treatment in Financial Statements

 Financial Statement Treatment Balance Sheet Presented as Long-term Investments in the balance sheet under the head “Non-Current Assets”

2. Short-term Investments

Investments that are held with an intention to dispose off within a period of 1 year are referred to as Short-term Investments. They are held primarily for the purpose of trading. They are also known as Marketable Securities.

Examples

a. Investment in Mutual Funds
b. Acquisition of Shares of companies

Treatment in Financial Statements

 Financial Statement Treatment Balance Sheet Presented as Short-term Investments in the balance sheet under the head “Current Assets”

An extract of the balance sheet has been attached for a better understanding of the presentation of investment.

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## Is cash book both a journal and ledger?

1. Yes, the cash book is both a journal and a ledger.  To make the concept simpler, I would like to familiarize you with the meaning of journals and ledgers, which shall help in determining the reasons for a cashbook to be both a journal as well as a ledger. Journal A journal is a descriptive financialRead more

Yes, the cash book is both a journal and a ledger.

To make the concept simpler, I would like to familiarize you with the meaning of journals and ledgers, which shall help in determining the reasons for a cashbook to be both a journal as well as a ledger.

## Journal

A journal is a descriptive financial record of a business that is used for future reconciling as well as a transfer to other books of accounts such as the ledger. It is a book of original entry.

Cashbook is considered to be a journal because all the cash/bank receipts and payments are recorded in this book in a descriptive form similar to journal posting.

## Ledger

In simple words, a ledger refers to recording individual accounts in a summarized form that are posted from a journal. It is a book of principal entry.

A cashbook is considered to be a ledger because all the cash transactions that are made during a particular financial period are recorded in this book in a chronological order. When a cashbook is prepared there is no need for a cash a/c as the book serves the same purpose and therefore can be used as a substitute.

Format of a Cashbook

Cashbook

 Date Particulars V.No. L.F. Cash Date Particulars V.No. L.F. Cash To Capital a/c By Advertisement a/c To Sales a/c By Purchases a/c To Mr. C’s a/c By Stationery a/c To Bank a/c By Office expenses a/c By Rent a/c By Salary a/c By balance c/d

Note: As we can see the format and posting of a cashbook are similar to that of journal and ledger accounts.

Hope this helps.

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## Return inwards and Return outwards are deducted from?

Return Inwards The return inwards arises when goods that are sold are returned back and hence it has to be deducted from the amount of sales. For Example, I am a dealer in smartphones and I sell them on amazon and amazon has 30 days replacement guarantee scheme especially when the customer buys a ceRead more

# Return Inwards

The return inwards arises when goods that are sold are returned back and hence it has to be deducted from the amount of sales.

For Example,

I am a dealer in smartphones and I sell them on amazon and amazon has 30 days replacement guarantee scheme especially when the customer buys a certain electronic item. Hence for me when the customer returns the smartphone that he purchased it becomes a return inward and so it will be deducted from my sales.

# Return Outwards

The return outwards arises when the goods purchased are returned either the entire order or only a part of it. Hence, it will be deducted from Purchases.

For Example,

I am a watch dealer and I have placed an order with my supplier to supply 20 Smart Watches but he sent me 5 watches of another model so I return them. This is a case of return outward as I am sending goods back to the supplier and hence it shall be deducted from my purchases.

I guess if you are still not clear with the answer above the below-inserted image may help –

Aastha Mehta

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## Are accounts receivable asset or revenue?

Accounts receivable as an asset I think before getting onto this question you should have a clear idea about what does an account receivable mean. An account receivable refers to an amount due to be received by the company for the sale of goods or services rendered. It's the value of goods that theRead more

# Accounts receivable as an asset

I think before getting onto this question you should have a clear idea about what does an account receivable mean.

An account receivable refers to an amount due to be received by the company for the sale of goods or services rendered. It’s the value of goods that the customer has not yet paid even though he has received the title of goods or enjoyed services.

In simple words, any sum of money owed by a person for purchase made on a credit basis refers to an account receivable.

For Example,

Uber Inc. purchases 2000 units of smartphones from Apple Inc. for gifting them to its employees it purchases it on a 45 days credit and the amount remains due on a reporting date hence such an amount due becomes an account receivable for Apple Inc.

## Why is it an asset?

As explained earlier accounts receivable is the money owed by the client to the company. Hence, it can be said that the company has a right to receive the money since it has already delivered a product or rendered service. Because of this, the customer must pay to the company within a specific time frame.

And so it’s an Asset since it ensures the future economic benefit for the company.

The accounting treatment of such a transaction at the time of making a credit sale:

 Accounts Receivable a/c Debit Increase in Asset To Sales a/c Credit Increase in Revenue

And at the time of actual receipt of cash :

 Cash A/c Debit Increase in Asset To Accounts Receivable A/c Credit Decrease in Asset

It shall be presented in the balance sheet under the head of the current asset if the amount is receivable within a year and beyond that, it’s recorded under the head of non-current assets
In case you are unable to understand the position of such item in a balance sheet the below example would be of great help

## Why is it not a revenue?

Revenue is the income generated by an entity. A major part of such revenue comes from sales or if an entity renders services from such services. It covers only that part of it pertaining to the current reporting period.

Whereas the balance in the accounts receivable includes the unpaid dues from the customers for the current reporting period and earlier reporting period.

Thus it can be said that the accounts receivable balance > amount reported in an income statement.

Because of the reasons stated above, it can safely be concluded that accounts receivable is an asset.

If the bad debts exist the company will have to reduce such balance from the total of accounts receivable and will have to debit it in its profit and loss statement.

I have tried to answer it as simply as I can and I hope it helps.

Aastha Mehta

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## Is prepaid rent a current asset?

Prepaid rent includes rent, therefore, you might be thinking that it is an expense, right? Clearing your assumption, that is incorrect. Prepaid rent is a current asset. In simple words, prepaid rent is recorded under current assets in the balance sheet because often businesses pay the rent before thRead more

Prepaid rent includes rent, therefore, you might be thinking that it is an expense, right? Clearing your assumption, that is incorrect. Prepaid rent is a current asset.

In simple words, prepaid rent is recorded under current assets in the balance sheet because often businesses pay the rent before the due date and it is utilized within a few months of its payment, usually within the same financial period. In the balance sheet, all the prepaid expenses that have not yet been consumed are recorded as a current asset about the time frame of one year.

# Prepaid Rent

You can think of prepaid expenses as the costs that have been paid but are yet to be utilized. For example, prepaid rent, prepaid insurance, prepaid salaries, etc.

When you make the payment of rent before its due date it is known as prepaid rent. Rent is usually paid in advance for multiple reasons such as availing a discount, is due on the first day of the month, the landlord demands a prepayment, etc.  For a better understanding of the concept have a look at the example given below.

## Example

Company X signs an agreement to rent a warehouse for 1,000 per month from March for 7 months. The landlord demands for payment of the total amount in February. The journal entries to be recorded are as follows:

 Feb Prepaid Rent a/c Debit 7,000 Debit the increase in asset To cash a/c Credit 7,000 Credit the decrease in asset

(being rent paid)

 March Rent Expense a/c Debit 1,000 Debit the increase in expense To prepaid rent a/c Credit 1,000 Credit the decrease in asset

(being prepaid rent adjusted as it expires)

Note: The total amount of rent (1,000 x 7) is initially recorded in the balance sheet under current assets as prepaid rent. Each month the asset account is reduced by the amount utilized. You have to decrease the asset account by 1,000 (7,000/7) and record the expense of 1,000.

Prepaid rent as shown in the balance sheet

(Extract of Balance sheet)

Hope this helps.

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## What is the difference between debt and liability?

In the business world, the terms "Debt" and "Liability" are used interchangeably and are understood to be the same. But in reality, they differ. Debt Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date. For Example, Term loans acceptedRead more

In the business world, the terms “Debt” and “Liability” are used interchangeably and are understood to be the same. But in reality, they differ.

## Debt

Debt is the money borrowed by a business entity which is to be repaid to the moneylenders at a future specified date.

For Example,

• Term loans accepted from a bank or financial institutions for business expansion
• Car loan, Home loan, Education loan

## Liability

Liability is an obligation to render goods or services or an economic obligation to be discharged off at a future date.

For Example,

• Outstanding payment to suppliers of raw materials
• Outstanding Expenses – accrued rent, outstanding professional fees, outstanding electricity expenses, unpaid salary, etc
• Bills payable
• Debts accepted by an entity

## Key differences between Debt and Liability

Now, let me help you understand the differences between the two terms discussed above, debt and liability.

## Liability

1. Narrow/Broad aspect Debt is an integral part of liability. It is a type of liability. Liability is a broader term and it includes debt and other payables.
2. Repayment mode Debt can be repaid back only in cash. Liabilities other than debt can be settled by rendering goods or services or by paying cash.
3. Occurrence Debt does not arise on a daily basis. It results only when an entity borrows money from another party. Other liabilities arise during the course of the day to day operations of the business.
4. Formal agreement Debt involves a formal agreement between the borrower and the lender. Liabilities apart from debt may not involve such a formal agreement between the parties.
5. Utilization Debt helps entities for business expansion and diversification. Liabilities help entities conduct their daily business functions and processes.
6. Interest payment The repayment of debt involves payment of interest along with the principal amount. Discharge of other liabilities may not involve payment of interest along with the actual amount of liability.
7. Option of installments Debt repayment usually provides an option of payment in installments. Liabilities settlement may not provide such an option to the borrower.

## Conclusion

All debts are liabilities, but not all liabilities are debts.

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## Can you give me a list of all liabilities in accounting?

Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulRead more

Yes, Arjun I will provide you with an exclusive list of all the liabilities in accounting and further classify them under short-term and long-term liabilities. The major reason behind this classification is only to develop a better understanding of liabilities. I hope this list will help you and fulfil your requirements.

# Short-Term Liabilities

## Meaning

The term short-term liabilities refers to the short- term financial obligations of companies, firms or enterprises to make the payments to these loans within one accounting period(i.e., within a year). These loans are generally taken to meet day to day working capital requirements of an organization such as the purchase of raw materials. Short-term liabilities are also known as current liabilities.

## Exclusive List of Items

2. Sundry creditors
3. Accrued liabilities
4. Term debt
6. Short-term obligations
7. Unearned revenue
8. Salaries and wages payables
9. Sales tax payable
10. Bank loan
11. Outstanding expenses
12. Merchandise accounts payable
13. Deferred revenue
14. Commercial paper
15. Credit-card debt
16. Bank overdraft
17. Dividends payable
18. Customer deposits
19. Current portion of long-term debt
20. Short-term provisions and reserves
21. Accrued payroll
22. Notes payable to banks
24. Rent payable
25. Other short-term debts

# Long-Term Liabilities

## Meaning

The term long-term liabilities refers to the long-term financial obligations of the firms, companies or enterprise which remains due for more than one accounting period. Generally, such loans are either taken to acquire fixed assets or to make payment to a long-term debt such as payments to debenture holders. Long-term liabilities are also known as long-term debt or non-current liabilities.

## Exclusive List of Items

1. Long-term borrowings/debts
2. Specific loans for purchasing fixed assets
3. Deferred tax liabilities
4. Derivative liabilities
5. Pension obligations
6. Capital leasing
7. Car payments
8. Convertible debt
9. Long-term provisions and contingencies
10. Bonds payable
11. Pension liabilities
12. Debentures
13. Mortgages payable
14. Public deposits
15. Long-term warrants
16. Long-term notes payable
17. Loans from shareholders
18. Lease contracts
19. Post-retirement benefits reserve
20. Deferred long-term liability charges
21. Deferred compensation
22. Other non-current liabilities

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