Examining Liabilities and Owner s Equity

Examining Liabilities and Owner ‚ s Equity

Now turn your attention to the other half of the balance sheet, the half that describes liabilities and owner ‚ s equity. Just as we did with assets, we will examine the proportion of each type of item under liabilities and owner ‚ s equity so that you can see how you can communicate your value in helping your organization maintain its optimum balance or financial position.

Accounts Payable

On the liabilities and owner ‚ s equity half of the balance sheet (figure 5-1), you can see that accounts payable and accrued expenses are the current liabilities. Accounts payable consists of purchases required for ABC to manufacture its goods, create its inventory, and run its daily operations. Accrued expenses consist of expenses such as property taxes that accrue every day that an organization owns a piece of property, but which will be paid on a specified future date. Pay due to employees can also accrue each day but will be paid only at specified times during a month.

ABC MediCompany ‚ s balance sheet (figure 5-1) does not break out under the entry for long-term liabilities the types of long-term liabilities ABC has incurred in the last year. You can see from the balance sheet that ABC has significantly increased its long-term liabilities. In the last year ABC management has decided that it needs to renovate, improve processes, and expand some of its marketing efforts in order to stay competitive. For this reason, ABC chose to take on additional long- term debt.

 

Owner ‚ s Equity

The remainder of the balance sheet (figure 5-1) is shown as owner ‚ s equity. In a corporation, owner ‚ s equity is called shareholder ‚ s equity. There can be a number of items that make up owner ‚ s or shareholder ‚ s equity. Owner ‚ s equity can be built through contributed capital or through retained earnings or the net profit that the organization kept for itself. In corporations, shareholders can obtain equity by purchasing common or preferred stock. For additional information on balance sheets, please take a look at the books listed in the Additional Resources section at the back of this book.