Liabilities are future obligations and future sacrifices of economic benefits
arising from past transactions. Depending on maturity of obligations, liabilities
could be divided into two major groups; long-term liabilities and current liabilities.
Current Liabilities
Payables within one year are designated as current liabilities. Current liabilities
include, notes payable, accounts payable, current portion of long-term debt,
accrued payments and deferred taxes.
Accounts
Payables are short-term obligations to creditors arising
from purchases of goods and services. This is an interest free fund available
in the business, which can be utilized for funding working capital.
Notes Payable are amounts due to suppliers or financial institutions
arising from promissory notes and financial transactions.
Current
Portion of
Long-term Debt is the sum that is falling
due within one year of a long-term loan. In other words, the portion of principal
in current installment of a long-term loan outstanding.
Accrued
Payments arise when expenses are accounted prior to actual
cash flow. According to prudence concept, expenses incurred in a period are
recognized irrespective of the payment date.
Bank
Overdrafts are also part of current liabilities where short
term financing facilities or overdrawn current account figure is shown.
Long-term
Liabilities are obligations which are not falling due
within the operating cycle and expected to be payable in a longer time span.
All non current liabilities are parked here. Notes payable, deferred tax, pension/retirement
benefits, lease obligations are examples of long term liabilities. There are
generally very extensive disclosures on long term liabilities due to various
covenants.
Deferred
Tax is an obligation to tax authorities. This arises
due to differences between reporting income and taxable income.
Shareholders' Equity
This is an important element in the balance sheet and represents shareholders
participation in capital. Share capital is accounted for at par irrespective
of the issue price; premium or discount. The undistributed profits are also
part of the owners' equity and highlighted separately under shareholders' equity.
There are three components in the shareholders equity namely ordinary share
capital or common stock, additional paid in capital and retained earnings.
Common
Stock is the issued capital portion of authorized share
capital stated at par value. There should be disclosures on share capital authorized,
issued and par value. Any reacquisition of shares should be deducted from issued
capital and shown separately.
Additional paid-in-capital refers to the premium paid by shareholders
on share issues.
Retained
Earnings are undistributed income accumulated since
inception, which are reinvested back in the business. This is the portion of
the profit brought forward over the period after paying any dividends to shareholders.
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