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Section: 2 Balance Sheet

Sub Section: 2 Liabilities

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.