Accounting – Equity and Liabilities

Liabilities

A liability is a company’s “promises” to pay to its vendors, staff or other party that provides goods or services to it. The liability accounts will in most cases have a credit balance. Below are some of the liability accounts that you normally would see in an ordinary balance sheet.

Trade payable

This is an account that records all the trade-related owings to its vendors and typically the main suppliers, landlord and staff (unpaid wages) etc.

Deferred Income Account

Under the accrual method of accounting (Also see Basic accounting concepts), the revenue should match against the period in which the cost is incurred, or the other way round, depending on the trigger point. Deferred income are some payment received in advance but pertaining to services that is going to be rendered in the next financial period.

Bank Borrowing Account

It is not an unusual practice for a company to secure a loan to purchase assets such as motor vehicle or office premises in the process of running the business. Such purchases usually finance by long term borrowing as the amount involved is significant that most business owners can’t afford to pay in one goal. In such case, the liability has to be split into current (due within twelve month) and non-current (due after twelve month) so to enable the user of the financial statement the ability to gauge the timing in which the debts will fall due.

Equity

Equity is the entitlement of the shareholders or investors in the company. Similar to liability, the equity accounts will often also have a credit balance. Below are illustrations of equity accounts that you frequently find in balance sheet.

Share Capital Account

Any private company (Sdn Bhd) in Malaysia (Also see Pros and cons of setting up a company) would have share capital and what that means is basically the “long-term” finance provided by shareholders. In short, this is the capital for the business. Unlike some other countries, Malaysia has abolished the idea of par value so the amount in Ringgit carries more weight than the number of shares when reading the financial statements (Also see The Most Important Parts Of The Income Statement).

Retained earnings and other reserves

What is left for the ordinary shareholders cumulatively, after deducting the taxes, all the interest on borrowings and preference shares’ dividend are known as retained earnings. The retained earnings normally serve two purposes, to be distributed as dividends to the ordinary shareholders or to be segmented out as other reserves for strategic reasons, future growth or to meet repayment obligation that is going to fall due in the near future.

Engaging an accounting firm in Johor Bahru will definitely help you to better understand each “financed by” components in the balance sheet so to offer you more insights on how you can structure your source of finance.