Notes payable are short-term obligations in the form of promissory notes to suppliers or financial institution. A line of credit permits borrowing from a financial institution up to a maximum amount.
When a firm has bonds, mortgage, or other forms of long-term debt outstanding, the portion of the principal that will be repaid during the upcoming year is classified as a current liability. The note lists the amount of long-term debt outstanding, less the portion due currently, and also provides the schedule of current maturities for the next five years.
Most corporations use the accrual rather than the cash basis of accounting: Revenue is recognized when it is earned, and expenses are recorded when they are incurred, regardless of when the cash is received or paid. Accrued liabilities result from the recognition of an expense in the accounting records prior to the actual payment of cash. Thus, they are liabilities because there will be an eventual cash outflow to satisfy the obligations.
Companies which are paid in advance for services or products records a liability upon the receipt of cash. The liability account is referred to as unearned revenue or deferred credits. The amounts in this account will be transferred to a revenue account when the service is performed or the product delivered as required by the matching concept of accounting.
Obligations with maturities beyond one year are designated on the balance sheet as noncurrent liabilities. This category can include bonded indebtedness, long-term notes payable, mortgages, obligations under leases, pension liabilities, and long-term warranties.
The ownership interests in the company are represented in the final section of the balance sheet, stockholders’ equity or shareholders’ equity. Ownership equity is the residual interest in assets that remain after deducting liabilities. The owners bear the greatest risk because their claims are subordinate to creditors in the event of liquidation; but owners also benefit from the rewards of a successful enterprise.
Common shareholders do not ordinarily receive a fixed return but do have voting privileges in proportion to ownership interest. Dividends on common stock are declared at the discretion of company’s board of directors. Furthermore, common shareholders can benefit from stock ownership through potential price appreciation （or the reverse can occur if the share price decline）. The amount listed under the common stock account is based on the par or stated value of the share issued. The par or stated value usually bears no relationship to actual market price but rather is a floor price below which the stock cannot be sold initially.
Additional paid-in capital reflects the amount by which the original sales price of the stock shares exceeded par value. It is not affected by the price changes resulting from stock trading subsequent to its original issue.
The retained earnings account is the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of cash or stock dividends. Retained earnings do not represent a pile of unused cash stashed away in corporate vaults; retained earnings are funds a company has elected to reinvest in the operations of the business rather than pay out to stockholders in dividends. Retained earnings should not be confused with cash or other financial resources currently or prospectively available to satisfy financial obligations. Rather, the retained earnings account is the measurement of all undistributed earnings.
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