Liabilities in Balance Sheets

As we discussed previously in Balance Sheet post,
Now we have seen the Asset part. Lets look at the Liabilities part of the Balance Sheet.

Liability is a part of the balance sheet which is the part which is 'payable'. Which means that the portion which the company should give back or is supposed to give back. This means that the company might have either taken money from someone or might have borrowed money.

This money can be either taken for running day to day operation or doing some investment for the company of expansion of the company. This decides the nature and the classification of the money used and treated in that way.

In Liability there are three major parts -

Equity
Debt
Current Liabilities.

Overall, the liability portion can be classified in these three categories. Over and above this, there are different areas which add and get reduced as per the nature and requirements of the organization and industry.

The first two parts are called 'Sources of Funds'. This means that they are the ways of raising the money for the organization. A firm can raise money in two parts, Through raising equity of the company and borrowing money in the form of loan, which is 'debt'.

The equity part is basically issuing of shares of the company to people who are ready to give money to company for business. The person who gives money, is given part of company's profit sharing pattern, hence it is called 'share' which is issued.

The debt of the company is the part in which the company raises money, either from banks or investors, or promoters of the company. If there is money raised by giving some security as a 'collateral', it is called 'secured loan'. The money raised without security, or given by promoter of the company is called 'unsecured loan'.

The current part in which the company is liable to pay to the person from whom some business transactions have been done in this current year, are the payable parts which come in 'current liability' of the company. This part has components like creditors, bills payable, etc which are the components which make the current part of the company's workings.

Assets in Balance Sheets

As we discussed previously in Balance Sheet post, there are two components of balance sheet ; Assets and Liabilites.
Among them we would discuss about the asset part in this post.

The students from commerce and MBA education field would find this information useful.

Assets are the components which are owned by the company either in physical form or on paper.
The assets are in short what the company has got in its hand, which can be used to repay the liability if required. Hence it balances the liability.

As discussed, The assets include three major parts

-Fixed Assets
-Investments
-Current Assets

Lets talk about each component of the assets.

The Fixed Assets are the portion of the assets column, which include all the components which can be categorized as fixed in nature. The classical components which fall under this category are Building, Machinery, Land etc, which have the nature of fixed property.

The Investments is the part which includes all components which are investments done by the organization. The organizations purchase of shares of other companies, Investment done in other companies, purchase of shares of other companies are the common examples of investments done by the organization.

The Current Assets incorporate the current savings and income of the company gained within this present financial year. These are the assets which are generally used for the present working of the company. The current assets are also the components which, if are able to be equal or more than 'current liability' of the company, it is considered to be a healthy situation of the company. The common components of current assets are; cash in hand, cash in bank,debtors, work in progress, raw materials, etc.

These more or less form to be components of balance sheet's asset side. The components may add up or get deleted from each balance sheet, depending upon the nature and components required for that nature of business.

For example, if we are looking at a balance sheet of a recruitment firm, we surely wont have any 'raw material' component in the asset side, as it is a service oriented business, and the 'raw material' component is generally referred for a manufacturing business.

Balance Sheet

In accounts and finance world the most important final account considered is the Balance Sheet.
It is basically a document which depicts the financial position of the company. The document is generated generally on the last day of the financial year.

There are two parts of balance sheet; Assets and Liabilities.
The Assets contain all the components which are owned or belong to the organization.
The Liabilities are the payables or components which the company is liable to repay.

The balance sheet gives a correct depiction of what is the current state of the organization. This document is used as a base to evaluate many financial analysis and a platform for many analytics.

The assets include three major parts

-Fixed Assets
-Investments
-Current Assets

The liabilities include three major parts

-Equity
-Debt
-Current liabilities & provisions.


Different accounting standards have defined different formats in which the balance sheet and its components should be represented. However, looking at a larger picture of the balance sheet, these are the pre-dominant components which formulate the balance sheet.

The assets components should be able to equate the liability, which the payment liability for the company. Hence it is called a 'Balance' sheet, wherein the components are balanced.

More clarity will be seen in the coming posts where I would demonstrate a balance sheet with help of a balance sheet example.