Understanding Company Liabilities and Assets
Definition of Current Liabilities
Consists of those debts that the company has a financial return. Therefore, they correspond to the mass of assets required in the short term:
- Callable in the short term: Consists of the debts of the company and should return soon. These are situations in which goods or services are received and not paid, so they remain a duty or an obligation of payment.
Definition of Non-Current Liabilities
Consists of those sources of funds to be returned in a period exceeding the duration of a financial year, i.e., those heritage items that pose a debt that the company should return in the long term (more than a year). The corresponding mass of assets is attributable to the long term.
Definition of Equity (Net Worth)
Equity represents the company’s resources allocated to self-financing (equity or capital), and those who are outside but will not be returned, such as grants or donations. The main part is the capital, i.e., the contribution of partners. You can also call it not required.
Concept of Property Element
The assets are the assets, rights, and obligations that are mass assets, which in turn are the heritage of the company. The name used to describe each item or group of elements with similar features is not arbitrary, but is normalized, i.e., all persons who use the accounts use the same name to define the same element. For example, the items shop, warehouse, and offices fall under the name of buildings.
All this is normalized and grouped in the General Accounting Plan.
Concept of Balance Sheet
A balance sheet is an inventory in which each asset that the company currently has is conveniently listed. Assets are grouped into masses and form the active and passive. This provision is not random, as it is intended, at a glance, to relate the sources of funding (liabilities) with investment (assets).
The balance sheet is a document that shows the assets of a company at a given time, i.e., it reflects a static position of the heritage at a moment in the life of the company.
The balance reflects all assets, rights, and obligations that the company has on a particular date, the day that the balance is formalized. Normally, the balance date is December 31, particularly in financial companies, which coincides with the calendar year. But it can be done on other dates, such as in a school where the year starts on September 1 and ends on August 31, and therefore the balance is on that date.
The outcome is an element of information that companies have in common and can be used to make comparative analyses between those pertaining to the same sector of economic activity. In addition, businesses can compare past budgets and draw conclusions about their evolution; they can somehow predict the future.
The Profit and Loss Account
The profit and loss account is an income statement intended to calculate the result that a company has obtained during a financial year, in addition to explaining the composition of output and the operations that have been done to reach this result.
This account is a dynamic statement, since it reflects the economic flows throughout the financial year. The profit and loss account is a mandatory annual account and provides an important source of information on the expenditure and revenue of companies. In addition, it determines the different accounting results (financial and operating results).
Like the balance sheet, this account must also be produced at the end of the financial year.