(B)
Liabilities
The
balance sheet reports Fast Delivery's liabilities as of the date noted in the heading
of the balance sheet. Liabilities are obligations of the company; they are
amounts owed to others as of the balance sheet date. Chima gives Femi some
examples of liabilities: the loan he received from his aunt
(Notes Payable or Loan Payable), the interest on
the loan he owes to his aunt (Interest Payable), the amount he owes to the supply
store for items purchased on credit (Accounts Payable), the wages he owes an employee but
hasn't yet paid to him (Wages Payable).
Another
liability is money received in advance of actually earning the money.
For example, suppose that Fast Delivery enters into an agreement with one of
its customers stipulating that the customer prepays N90000 in return for the delivery
of 30 parcels every month for 6 months. Assume Fast Delivery receives that N90000
payment on December 1 for deliveries to be made between December 1 and May 31. Fast
Delivery has a cash receipt of N90000 on December 1, but it does not
have revenues of N90000 at this point. It will have revenues only when it earns
them by delivering the parcels. On December 1, Fast Delivery will show that its
asset Cash increased by N90000, but it will
also have to show that it has a liability of N90000. (It has the liability
to deliver N90000 of parcels within 6 months, or return the money.)
The
liability account involved in the N90000 received on December 1 is Unearned Revenue. Each month, as the 30 parcels are
delivered, Fast Delivery will be earning N15000, and as a result, each month N15000
moves from the account Unearned Revenue to Service Revenues. Each month Fast Delivery's
liability decreases by N15000 as it fulfills the agreement by delivering
parcels and each month its revenues on the income statement increase by N15000.
(C)
Stockholders' Equity
If
the company is a corporation, the third section of a corporation's balance
sheet is Stockholders' Equity. (If the company is a sole proprietorship, it is
referred to as Owner's Equity.) The amount of Stockholders' Equity is exactly
the difference between the asset amounts and the liability amounts. As a result
accountants often refer to Stockholders' Equity as the difference (or residual)
of assets minus liabilities. Stockholders' Equity is also the "book value"
of the corporation.
Since
the corporation's assets are shown at cost or lower (and not at their market
values) it is important that you do not associate the reported amount of
Stockholders' Equity with the market value of the corporation. (Hence, it is a
poor choice of words to refer to Stockholders' Equity as the corporation's
"net worth".) To find the market value of a corporation, you should
obtain the services of a professional familiar with valuing businesses.
Within
the Stockholders' Equity section you may see accounts such as Common Stock, Paid-in Capital in Excess of Par Value-Common Stock,
Preferred Stock, Retained Earnings, and Current Year's Net Income.
The
account Common Stock will be increased when the corporation issues shares of
stock in exchange for cash (or some other asset). Another account Retained
Earnings will increase when the corporation earns a profit. There will be a
decrease when the corporation has a net loss. This means that revenues will
automatically cause an increase in Stockholders' Equity and expenses
will automatically cause a decrease in Stockholders' Equity. This
illustrates a link between a company's balance sheet and income statement.
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