Business requires some resources which it uses over its useful life. Resources do not come free; business requires finance to acquire them. Finance is provided by the owners through investments, Banks, other financial institutions, suppliers.
The balance sheet shows the financial position i.e. balances of assets, liabilities on balance sheet, and capital of an entity at the end of the financial year.
It shows the sources of the fund (liabilities and capital) and also the application of such funds (i.e. Assets). The total amounts of both the liabilities on balance sheet and assets on the balance sheet must match because of the accounting equation (Assets = Liabilities + Capital).
Let us discuss the liabilities on balance sheet in detail.
Browse more Topics Under Final Accounts
- Steps in the Process of Finalization of Accounts
- Preparation of Trading Account
- Profit and Loss Account
- Liabilities on the Balance Sheet
- Assets on Balance Sheet
- Manufacturing Account
Liabilities on Balance Sheet
- Reserve and Surplus
- Long Term or Non-Current Liabilities
- Short Term or Current Liabilities
The capital of a business is the amount which the owner or owners of the business contribute.
Thus, owners can contribute Capital at the time of starting the business or even later as per the requirements of funds. According to the business entity concept, owners and the business are separate entities.
Therefore, Any contribution made by the owners by way of capital to the business is the liability.
Capital consists of all the fixed assets and current assets. Capital can be kind or cash.
Thus, the capital of a business entity is classified as fixed capital and working capital. Working capital is the excess of an entity’s assets over its current liabilities.
2. Reserve and Surplus
Business is a going concern. Entities keep making profits and incurring losses year to year.
Thus Accumulation of such Profits or losses increases or decreases the owner’s equity or capital.
Learn more about Financial Statements here in detail
3. Long Term or Non-Current Liabilities
These are the obligations which are to be settled over a long period of time. A business can raise Long term funds by way of loans from banks, financial institutions. The repayment of such loans is in installments over the tenure of such loan.
Usually, the business raises such funds to procure the fixed assets. Long term funds should not be utilized in running the day to day business operations.
Usually, Long term loans are secured.
4. Short Term or Current Liabilities
Short term liabilities are the liabilities which have to be redeemed in the near future.
For example – trade payable, bank overdraft, bills payable etc. A liability is classified as a current liability if it is expected to be settled in the normal operating cycle i. e. within 12 months.
Current liability comprises of following
- Sundry Creditors: Sundry creditors are the amounts payable to the suppliers of goods. Creditors are the liability of the business entity. Liability for such creditors reduces with the payment made to them.
- Advances from customers: Some customers make the payment in advance for goods. It is the obligation of a business until it supplies the goods. In case of failure to deliver the goods, we shall return the amount. Thus, until we supply or sell the goods, we need to treat the Advances as a liability.
- Outstanding Expenses: Outstanding expenses are the expenses whose services are availed but the payment is not yet made. For example, We usually pay the electricity Bill of March, in April.
- Bills Payable: Sometimes suppliers do not give credit without any security. Suppliers supply goods against a promissory note to be signed as a promise to pay a certain amount at a certain date. Such promissory notes or bills are known as bills payable.
- Bank Overdraft: Banks provide various kinds of services. Banks may give an overdraft facility to any business entity. In an overdraft facility, a business entity can issue cheques up to a certain limit. Banks will honor these cheques and will recover the amount from the respective business entity.
Questions on Liabilities side of Balance Sheet
Prepare a balance sheet of Mr. P, for the year ended 31st March 2017. Capital ₹ 500000, Drawings ₹150000, Cash in hand ₹27000, Loan from Bank ₹40000, Sundry creditors ₹80000, Bills Payable ₹40000, Bank Overdraft ₹25000, Goodwill ₹1, 01, 000, Sundry Debtors ₹80000, Land & building ₹65000, Plant & machinery ₹80000, Investment ₹20000, Bills Receivable ₹21000 and Cash at Bank is ₹35000, Closing Stock ₹106000.
Balance Sheet of Mr. P
For the year ended 31st March 2017
Liabilities on Balance Sheet
|Land & building
|Plant & machinery
|Cash at Bank
|Cash in hand