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.
Related Links
You May Also Like
-
General Ledger - Advanced Features
Modern automated general ledger systems provide detailed and powerful support for financial reporting and budgeting and can report against multiple legal entities from the single system. These systems offer many advanced functionalities right from journal capture to advanced reporting. This article will provide an overview of some advanced features available in today's General Ledgers.
-
Shared Services is the centralization of service offering at one part of an organization or group sharing funding and resourcing. The providing department effectively becomes an internal service provider. The key is the idea of 'sharing' within an organization or group.
-
Defining Organizational Hierarchies
A hierarchy is an ordered series of related objects. You can relate hierarchy with “pyramid” - where each step of the pyramid is subordinate to the one above it. One can use drill up or down to perform multi-dimensional analysis with a hierarchy. Multi-dimensional analysis uses dimension objects organized in a meaningful order and allows users to observe data from various viewpoints.
-
Internally, an organization can be structured in many different ways, depending on their objectives. The internal structure of an organization will determine the modes in which it operates and performs. Organizational structure allows the expressed allocation of responsibilities for different functions and processes to different entities such as the branch, department, workgroup and individual.
-
In every journal entry that is recorded, the debits and credits must be equal to ensure that the accounting equation is matched. In this article, we will focus on how to analyze and recorded transactional accounting information by applying the rule of credit and debit. We will also focus on some efficient methods of recording and analyzing transactions.
-
Hierarchical Organization Structures
Hierarchical structure is typical for larger businesses and organizations. It relies on having different levels of authority with a chain of command connecting multiple management levels within the organization. The decision-making process is typically formal and flows from the top down.
-
Legal Structures for Multinational Companies
A multinational company generally has offices and/or factories in different countries and a centralized head office where they coordinate global management. A multinational company (MNC)is a corporate organization that owns or controls the production of goods or services in at least one country other than its home country.
-
Concept of Representative Office
A representative office is the easiest option for a company planning to start its operations in a foreign country. The company need not incorporate a separate legal entity nor trigger corporate income tax, as long as the activities are limited in nature.
-
GL - Journal Posting and Balances
In this tutorial, we will explain what we mean by the posting process and what are the major differences between the posting process in the manual accounting system compared to the automated accounting systems and ERPs. This article also explains how posting also happens in subsidiary ledgers and subsequently that information is again posted to the general ledger.
-
In this article, we will explain the general Ledger journal processing flow from entering journals to running the final financial reports. Understand the generic general ledger process flow as it happens in automated ERP systems. The accounting cycle explains the flow of converting raw accounting data to financial information whereas general ledger process flow explains how journals flow in the system.
