This post is part of the Finance for Non-Financial Managers book series of posts, which is the first subset of posts in the larger PMBA series of posts. You can buy Finance for Non-Financial Managers from the author Gene Siciliano for $14.95.
As I start this second post (see first post) of a 2 post double team of one chapter, I skim the remaining pages of the chapter and find that the Liabilities portion consists of: CURRENT LIABILITIES, LONG-TERM LIABILITIES, and STOCKHOLDER’S EQUITY.
CURRENT LIABILITIES are like current assets in that they are expected to be paid back within the next 12 months. Current liabilities include:
- accounts payable
- accrued payroll
- other accrued liabilities
- notes payable and other bank debt
- current portion of long term debt
Accounts payable, the biggest portion of the liabilities, is made up of bills from service providers and suppliers. Accrued payroll is that portion of payroll that has been worked for, but not paid out yet. Other accrued liabilities, such as loan interest that does not get invoiced, or supplies that have been bought, but for which no invoice exists yet, are included under this sub heading. Actual loans (not the interest paid on the loan) is shown in the notes payable and other bank debt. As a side note, banks sometimes add what are called covenants to business loans. These are rules to either do (like send quraterly reports, keep insurance etc.) or not to do (be a part of a merger, or use business assets as collateral for another loan etc.) certain things. Current portion of long term debt is self-explanatory.
In the section on LONG-TERM LIABILITIES, the book states that many sub headings can be found under that term, but only describes those that are on the Wonder Widget’s balance sheet, those being: lease contracts, long-term debts, and loans to stockholders, with the balancing sub heading of less current portion of long term debt.
Lease contracts, if actual leases, may not show up on the assets and liabilities of a balance sheet, because at the end there is not a transfer of ownership (no asset) to be tracked (note to self: research leases, as I do not totally understand this statement). That being written, some leases are written as purchase agreement, and do show up on the balance sheet. More often seen on privately held companies’ balance sheets, loans from stockholders often refers to the money that business owners have leant the business in times of need. Also mentioned in this same section is a tidbit that states, “…these amounts can end up looking more like owner’s equity than loans to the company, often a frustrating reality for entreprenuers and small business owners, who had hoped to be repaid at some point.” [Siciliano, Gene. Finance for Non-Financial Managers. New York: McGraw-Hill, 2003.]
Finally the book talks about STOCKHOLDER’S EQUITY under the chapter sub heading of “Ownership Comes in Various Forms” with the sub-sub-headings of: capital stock and contributed capital, and retained earnings.
Stocks are sold at par-value and the purchasing of stock at par value is listed under capital stock. Because some par value on stock is listed as $0, money contributed to the company beyond the face value of the shares of stock is listed under contributed capital. RE, or retained earnings are those monies that the company either lost or gained (through profits) over the years. Only corporations may have retained earnings, as profits from other unincorporated business structures must flow their revenues through to the organization’s owners. Retained earnings are usually kept in order to some time in the future:
- Buy other companies
- Protect itself against a possible catastrophe
- Repurchase its own stock, when prices are low
- Ensure adequate working capital to run the business
(the above bulleted list was taken directly from [Siciliano, Gene. Finance for Non-Financial Managers. New York: McGraw-Hill, 2003.]).