Equity and Liability Accounts

Funds contributed by owners in any business are different from all other types of funds. Equity is the residual value of the business enterprise that belongs to the owners or shareholders. The funds contributed by outsiders other than owners that are payable to them in the future. Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities are debts payable within one year.

Equity Accounts:

The amount of the funds contributed by the owners (the stockholders) added or subtracted by accumulated gains and losses. Equity is the residual value of the business enterprise that belongs to the owners or shareholders.

Funds contributed by owners in any business are different from all other types of funds. Generally, they don’t have any cost of carrying for the business and in the event of winding up of the business, shareholders are entitled to the residual value of the business after discharging all other liabilities. They are expected to remain invested in the business for a long period of time and no immediate payback is anticipated in case of a going concern.

Equity accounts are also referred to as “Capital Account”, “Shareholder’s Funds” or “Accounts”, “Stock, Stake” and “Shareholder Equity”. Normally they have a credit balance and are reflected on the left side of the balance sheet. Profits and losses from each accounting year are added to Equity at the end of each year.

Balances in the Retained Earnings Account are transferred to “Equity” at the end of each accounting year. While running a revaluation of balances, equity is revalued using the historical rates in accordance with the accounting standards. Equity is a separate account type in ERP’s to segregate funds from owners and others.

Liability Accounts:

The number of funds contributed by outsiders other than owners that are payable to them in the future. Liability is an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services, or another yielding of economic benefits in the future.

Liabilities are generally classified as Short Term (Current) and Long Term Liabilities. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

Liabilities can be from a lot of sources like Loans, External Borrowings, Debt – Secured and Unsecured, Obligation for services received Balance Due or Credit due to Creditors. Some generally known examples of liabilities are any type of borrowing or loans from persons or banks or wages or salaries paid to employees or amounts payable to creditors for their goods and services and taxes payable to Governments.

Balances in the Equity and Liability Accounts are carried forward to next year after the close of the accounting year. While running a revaluation of balances, liability is revalued using the period end rates in accordance with the accounting standards. Liability is a separate account type in ERP’s to segregate funds from owners and others.

Intercompany transactions also result in receivables and liabilities (payables) between different units of the same entity. Such transactions are settled in cash if they are in the normal course of business. At the time of the final consolidation of accounts, these intercompany liabilities and assets need to be eliminated from the books of the parent entity. We will discuss this concept in detail in the Intercompany chapter.