Liabilities and Equity

Liabilities and Equity

Liabilities

A liability is “promise” made by a business to pay its suppliers, employee or another party that offers services or products to the business. Most of the time, liability accounts will have a credit balance. Here are a few liability accounts that you would see in a standard balance sheet.

Deferred Income Account

According to the accrual technique of accounting (see the What Is Accrual Basis Accounting?), the revenue must match the duration in which the expense is incurred, or vice versa, depending upon the trigger point. Deferred earnings are some payment obtained beforehand but relating to services that will be rendered in the coming financial duration.

Bank Borrowing Account

It is a common practice for a business to safeguard a loan to buy assets such as an office or motor vehicle when running its business. These purchases usually are funded by long term loan as the amount is significant that many entrepreneurs could not manage to pay in one goal. In such case, the liability is divided into current (due in twelve months) and non-current (due after twelve months) so to allow the user of the financial statement to determine the timing when the financial obligations will fall due.

Trade Payable

Trade payable is an account that records all owing to its suppliers and mainly the primary providers, employee (unsettled wages) the property owner and so on. This is slightly different from accrual (Also see Where Should You Record the Accruals on Your Balance Sheet?) in the sense that accrual are liabilities without invoice yet.

Equity

Equity is the right of the investors or shareholders of the company. The equity accounts are similar to liability as it commonly has a credit balance. Below are some examples of equity accounts that you often see on the balance sheet.

Retained Earnings and Other Reserves

Retained earnings are the amount left for the shareholders cumulatively, after subtracting the taxes (Also see What to expect from your tax agent?) and all the interest on loaning and the dividend of the preference shares.

One of the functions of retained earnings is to be segmented out as other reserves for tactical factors, to satisfy payment obligation that is going to due in the future or for future development. Another function of retained earnings is to be dispersed as dividends to ordinary investors.

Share Capital Account

Every private company (Sdn Bhd) in Malaysia will have share capital. Share capital is pretty much the “long-term” finance offered by shareholders. To simply put, this is the capital for business. Unlike other nations, Malaysia has eliminated the concept of par worth so that Ringgit brings more weight than the quantities of shares when reviewing the financial statement.

You will be provided more insights on how you can manage your company’s finance by engaging an accounting firm in Johor Bahru.