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Accounting. The Balance Sheet Liabilities. Dr. Clive Vlieland-Boddy FCA FCCA MBA. 4 Fundamental Accounting Concepts again!. Going Concern - That the business will continue and not be liquidated.

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The Balance Sheet


4 fundamental accounting concepts again
4 Fundamental Accounting Concepts again!
  • Going Concern - That the business will continue and not be liquidated.
  • Accruals (or Matching) - That income is matched with expenditure. You match the sale with the cost of that sale.
  • Consistency - What you did last year you do this. Otherwise figures would be meaningless.
  • Prudence - Caution is essential. Note “Prudence must prevail”
what is a balance sheet
What is a Balance Sheet
  • It is like a photograph taken on a given date of the financial position of the company.


the accounting equation
The Accounting Equation

The Assets = Liabilities + Shareholders

(Owners) Equity.

Assets = Liabilities & Equity

a balance sheet


Non Current

Shareholders Equity


Retained Earnings

A Balance Sheet…..



Non Current



  • Represent an obligation of the business arising from past events.
  • The settlement of this is expected to result in an outflow from the recourses of the business having itself created economic benefit.
  • If you will never have to write out a cheque or otherwise settle a claim then it is not a liability.

A liability is what its name says. It is a responsibility of the enterprise and is some form of debt.

There are 2 essential categories of these.

  • Current Liabilities -
  • Non Current Liabilities -
current liabilities
Current Liabilities

Those that are to be settled within 12 months. E.g.

  • Accounts Payable
  • Bank overdraft.
  • Dividends Payable
  • Tax Payable
  • Sundry Accruals
  • Current Proportion of Long Term Loans
accounts payable creditors
Accounts Payable (Creditors)
  • Most companies buy materials and supplies on credit paying for them weeks or even months later.
  • Thus the accounts must show that there is a liability outstanding when the goods are received / Invoiced, until they are actually paid for.
dividends payable
Dividends Payable
  • The amount that is due to be paid as dividends to shareholders.
tax payable
Tax Payable
  • Current Tax payable to the government.
tax deferred tax
Tax & Deferred Tax
  • Tax is divided into two categories. Tax that has to be paid to the government and tax that is delayed due to certain concessions or tax incentives.
  • Tax that is payable to the government is shown as a current liabilities as this will have to be paid quickly.
  • Deferred tax is a Non Current Liability as it is not payable for at least 12 months.
deferred tax
Deferred Tax
  • Tax that is not payable within 12 months.
sundry accruals
Sundry Accruals
  • In order to comply with the Matching Concept, it is necessary to make adjustments for items that have yet to be invoiced but are due and need to be matched with the year or accounting period to which they relate.
  • Example: A company receives its 3 month telephone bill one week after the year end. The whole bill relates to the closed year. This would need to shown as an Accrual.
non current liabilities
Non Current Liabilities

Those that are due to be settled after one year.


  • Loans with maturity more than 12 months away.
  • Mortgages
  • Deferred Tax
long term loans
Long Term Loans
  • Loans repayable more than 12 months away are treated as Non Current Liabilities.
  • Any portion repayable within 12 months will be shown as a current liability.
proportion of loans repayable within 12 months
Proportion of Loans repayable within 12 months


  • A Company has a bank loan of $100k repayable over the next 10 years by equal installments of $10k. Thus in Current Liabilities would be $10k and in Non Current Liabilities would be $90k.
dividends payable23
Dividends payable.

Dividends which are due and payable within 12 moths are normally shown separately under current liabilities.

accounting for contingencies
Accounting for Contingencies

Contingent loss




Probability of











In B/S


In Notes


In Notes


  • More than 50% likely we will have to write out a cheque.
  • Must show as a liability in the Balance Sheet.
  • Examples:
      • Warranty
      • Bad Debts (Accounts Receivable that might well not pay)
      • Proposed Management Bonuses or Audit Fees.
      • Litigation where the outcome is likely to be adverse..
  • Possible obligation from past events not within the companies control.
  • The present obligation may not have any financial effect or as yet not determinable.
  • If a contingency is more that 50% likely to happen then it is a provision and needs to be included in the Balance Sheet.
contingencies accounting treatment
Contingencies - Accounting Treatment
  • Should be disclosed in a note to the accounts.
  • A description given even in the notes.
  • Reasons for any uncertainty.
  • Attempt to quantify.
pension liabilities
Pension Liabilities
  • Most companies separate these out.
  • If still there then should show as Non Current Liability except the amounts payable to retired staff within next 12 months which are shown as Current Liabilities.
shareholders equity
Shareholders Equity
  • This is the capital that the owners have in the business.
  • It represents their investment into the enterprise.
  • It is sometimes know as Stockholders funds or just Equity.
share capital reserves
Share Capital & Reserves
  • The companies capital structure is initially written down in its foundation documents called Memorandum & Articles of Association.
shareholders equity31
Shareholders Equity
  • Limited Liability Companies require investors to provide capital. Initially in the form of shares and then by leaving their profits in the firm.
  • These profits that are left in the firm are called retained earnings‏
different types of shares
Different Types of Shares
  • Common or Ordinary Shares - These are the real owners of the company
  • ( Once you have 50% plus you own and control the company)
  • Preference Shares - Basically a loan. Normally no voting rights.
authorised issued and paid up
Authorised, Issued and Paid up
  • Authorised is the number and amount that the Memorandum permits. This can be changed upwards, normally by application to the Court.
  • Issued is the number of shares actually purchased.
  • Paid up is the number actually paid for.
  • Difference is that sometimes shares can remain unpaid.
shareholders funds retained earnings
Shareholders FundsRetained Earnings
  • The company will not normally pay all its profits to the shareholders as dividends.
  • They will retain some to fund the activities and growth of the business.
  • There profits not distributed are called “Retained Earnings”.
share premium
Share Premium
  • Shares sold by the company at a premium.
  • The premium is collected here.
share premium36
Share Premium
  • Where shares are say $1 each, often a company will sell them for say $1.50 or more.
  • This premium is shown as a separate item in the Shareholders Equity.
revaluation reserve
Revaluation Reserve
  • NCA’s can be revalued.
  • If they are, the increase should be recorded here.
  • Note that under IFRS these reserves cannot be distributed as dividends.
capital reserves
Capital Reserves
  • These are revaluation reserves generated by re-valuing a Non Current Asset or the disposal of a Non Current Asset.
treasury stock
Treasury Stock
  • Corporation’s own stock that has been issued and reacquired.
  • Reasons to reacquire own stock:
    • Limited investment opportunities.
    • To increase stock price.
    • To increase EPS.
    • To issue stock bonus to employees.
    • To prevent hostile takeover.
accounting for stock transactions repurchase of stock
Accounting for Stock Transactions: Repurchase of Stock
  • When common stock is repurchased, both assets (cash) and stockholders’ equity decrease by the purchase price.
  • The reduction in stockholders’ equity is accomplished by increasing a contra-equity account called treasury stock.
treasury stock41
Treasury Stock
  • Shares that the company has bought back.
  • Many issues over how to show these in the financial statements.
  • The balance represents the total that the enterprise has paid out to buy back shares.
after balance sheet events
After Balance Sheet Events
  • Activities occurring after the Balance Sheet date may or may not require adjustment or a note. Such events may be favourable or not.
  • Either provide evidence of conditions that existed at the Balance Sheet date or
  • indicate conditions that occurred after the Balance Sheet date but make a material effect to the possible future outcome.
off balance sheet finance
Off Balance Sheet Finance


  • Sale and lease back of a Non Current Asset or Fixed Asset along with its associated borrowings to a Special Purpose Vehicle (SPV) e.g. Enron!!!
  • Buying loss making companies via a SPV until they become profitable.
creative accounting
Creative Accounting
  • This represents manipulating the figures for a desired result.

Example: a company may try to improve the picture so as to inflate share price or gain beneficial loan arrangements. Alternatively, if tax was high, then possibly reducing profits so as to pay less tax. Often such adjustments are done at the year end by issuing invoices early or delaying until the next year.


The following excerpt was taken from a recent financial statement of Cummins Engine Company:

Loan agreements contain covenants which impose restrictions on the payment of dividends and distribution of stock, require maintenance of a 1.25:1 current ratio, and limit the amount of future borrowings.

Why would a creditor such as a bank impose such restrictions when making a loan?

abc limited balance sheet as at 31st may 2006
Current Liabilities

Accounts Payable 150,000

Tax Payable 50,000

Current Prop of Loan 25,000

Total Current Liabilities 225,000

Non Current Liabilities

Bank Loan 250,000

Shareholders Funds

Shares 25,000

Retained Earnings 50,000

Total Shareholders Funds 75,000

Total Liabs & Equity 550,000

ABC Limited Balance Sheet as at 31st May 2006

Current Assets

Accounts Receivable 200,000

Inventories 150,000

Bank Balance 125,000

Total Current Assets 475,000

Non Current Assets

Plant & Equipment 100,000

Less: Depreciation -50,000

Total Non Current Assets 50,000

Investments 25,000

Total Assets550,000

consolidated balance sheet
Consolidated Balance Sheet
  • Where you have a group of Companies, the parent will consolidate its subsidiaries into its own accounts.
  • It will add all the groups assets and liabilities together.
  • Minority Interest is the % that is not owned by the group.
quiz time
Quiz Time
  • Exercise 1.
prepare for next class
Prepare for next class
  • Exercise 2. We will work this together when we next meet.
group study research
Group Study Research

You should each look at 2 companies and evaluate for qualitative purposes. (See end of Chapter 6) This should include the following:

  • Industry Overview
  • Risk management
  • Corporate Governance
  • Corporate Social Responsibility
  • Transparency and clarity of the company financial information
  • Strategy – clear sustainable and achievable
  • Management strengths
  • Readability of the reported information
  • Additional shareholder tools and reports.
group study research52
Group Study Research
  • Once you have reviewed these 2 companies each, you should aim to eliminate one on the grounds that it fails for certain reasons against benchmarks that you have set. ( See end of chapter 6).
  • Then as a group you should evaluate these companies preparing a 30-40 minute presentation which will be made on the final session at the end of this course.
bye for now
Bye for now!

Please ensure you

Prepare for next session

I’m ready forsome leisure time.