Friday, April 4, 2008

The balance sheet, part III

This is the last part of the balance sheet series. I'm hoping to get into more detail about liabilities in this part. Hopefully this can be helpful. Read the previous part here.


Liabilities are amounts of money that a company owes, and are generally divided into two types - long-term and current. Long-term liabilities or non-current liabilities include bonds.
Current liabilities are expected to be paid within a year of the date of the balance sheet. They include:

  • creditors - largely suppliers of goods or services to the business who are not paid at the time of purchase.
  • planned dividends
  • deferred taxes - money that will have to be paid as tax in the future, although the payment does not have to be made now.
Current liabilities
Short-term debt 1,555
Accounts payable 5,049
Accrued expenses 8,593
Total current liabilities
Non-current liabilities

Deferred income taxes 950
Long-term debt
Total non-current liabilities
Total liabilities
Shareholders' equity
Common stock
Retained earnings
Total shareholders' equity

Total liabilities and stockholders' equity $34,959

Accrued expenses

Because of the matching principle, under which transactions and other events are reported in the periods to which they relate and not when cash is received or paid, balance sheets usually include accrued expenses. These are expenses that have accumulated or built up during the accounting year but will not be paid until the following year, after the date of the balance sheet. So accrued expenses are charged against income - that is, deducted from profits - even though the bills have not yet been received or the cash paid. Accrued expenses could include taxes and utility bills, for example electricity and water.

Shareholders' equity on the balance sheet

Shareholders' equity is recorded on the same part of the balance sheet as liabilities, because it is money belonging to the shareholders and not the company.
Shareholder's equity includes:
  • the original share capital (money from stocks or shares issued by the company
  • share premium: money made f the company sells shares at above their face value - the value written on them
  • retained earnings: profits from previous years that have not been distributed to shareholders
  • reserves: funds set aside from share capital and earnings, retained for emergencies or other future needs.

No comments: