Balance sheet 3: liabilities

A. Liabilities

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. (See Unit 33)

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.

B. 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.

C. 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.

Shareholders’ equity includes:

 the original share capital (money from stocks or shares issued by the company)

 share premium: money made if 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