Question

Why is the liabilities section of the balance sheet of primary significance to bankers?

Short answer

The liabilities section of the balance sheet is of great importance as it helps in understanding the organization’s liquidity.

Step-by-step solution

Meaning of Liabilities Section

Liabilities are treated as obligations of the company. The liabilities section of the balance sheet is recorded after the assets section in the balance sheet which includes different types of loans, debts, accounts payable, equities, etc.

Importance of liabilities section of the balance sheet to bankers

In consideration of any financial statements of a company, the balance sheet is regarded as an effective instrument in evaluating financial health at a certain point in time.

The banker being the lender of money is interested in the importance of his claim on the assets of the company in relation to other claims. All potential creditors are required to do the due diligence of the liabilities section and its associated footnotes indicating amounts, maturity dates, collateral, subordination, and restrictions of existing contractual deeds.

The assets and the revenue resource are equally important to a banker considering a loan.