WHAT ARE LIABILITIES?

This is the component of the balance that deals with a company's debt to outside parties. They represent the rights of others to expect money or services of the company. A company that has too many liabilities may be in danger of going bankrupt. Examples of liabilities include bank loans, debts to suppliers and debts to its employees. On the balance sheet, liabilities are generally broken down into current liabilities and long-term liabilities.

CURRENT LIABILITIES :

Are debts that are due within one year. They include the money owed for taxes, salaries, interest, accounts payable and notes payable. A company is considered to have good financial strength when current assets exceed current liabilities.

Accounts payable is the amount the company owes to suppliers that it has bought raw materials and other goods from. You will often see accounts payable on most balance sheets. Let us take the example used earlier for accounts receivable. When you purchase goods from the shopkeeper on a monthly-account basis, whatever money you owe him before the end of the month is counted as ‘accounts payable’ in your balance sheet. Since the money is paid over a short-term, accounts payable is counted as a current liability.

LONG-TERM LIABILITIES :

Are long-term loans that are to be paid back over a period greater than one year. These debts are often paid in installments. If this is the case, the portion to be paid off in the current year is considered a current liability.

WHAT IS SHAREHOLDER'S EQUITY?

This is the value of a business to its owners after all of its obligations have been met. Shareholder’s equity is calculated as the value of a company's assets subtracted from the value of its total liabilities. Shareholders' equity is also calculated by the sum of the amount of capital the owners invested, and the portion of the profits that the company reinvests rather than distributing as dividend.

Recollect that companies distribute a portion of their income as dividends to shareholders. Whatever left is called retained earnings. This is reinvested in the company for its operations. Thus, shareholder’s equity reflects how much the business is funded through the two key common sources – owners’ capital invested initially and the money accumulated over time from profitable operations.