Liabilities

A Liability is a financial obligation of the business. Liabilities can be of two types:

Short-term Liability

Long-term Liability

For Example, loans, Bills Payable, and Bank Overdrafts.

Current Liabilities:

Current Liabilities are the liabilities that are to be settled in the current fiscal year. The time for these liabilities is less than 1 year.

For Example, Short-term loans, Accounts Payable

Capital:

Capital is an amount the business owner has invested into the business to commence the business activities. Capital can also be further added to the business in the form of additional capital.

For Example, a Business Started with cash, Machine, and Stock. All these items are collectively called capital.

Drawings

Drawings are the cash amount or any other item withdrawn by the business owner for personal use. Business and business owners are considered two separate legal entities. Business owners have to pay the interest on drawings to the business.

Creditors

Creditors are our sellers from whom a business purchases goods on credit. Businesses have to pay the dues on time.

Bills Payable

Bills Payable is a legal document at the time of credit purchases drawn by the seller on the business owner. By accepting the bill of exchange, the business owner agrees to pay the dues on the specified date.

Outstanding Expenses

Outstanding expenses are the expenses for which the expenses are not paid in return for the goods or services availed.

These expenses are the monetary obligation of the business, which a business needs to fulfill in the future.

For Example, Postpaid mobile bills.

Unearned Income

Unearned income is the income that is received in advance without performing any service or sale of the goods.

These incomes are treated as a liability as the business is liable to perform the activity for the consideration received.

Retained Earnings

Retained earnings are the portion of profits kept by the business before the distribution of the dividend to the shareholders. These profits are retained in the form of reserves for the future.

Assets

An Asset is the possession of a business that provides some value. An asset could be either short-term or long-term. 

For Example, Stock, Machine, Plant, etc.

Debtors

Debtors are our customers to whom businesses sell goods on credit, considering they will clear the dues in the future.

Bills Receivable

In bills receivable, the Business owner draws bills of exchange in the name of the customer with the credit sales. Bills of exchange is a legal agreement between the business owner and the customer with a specific date written on it. 

Inventory is the stock of goods with the business to sell to the customers. 

Inventories are of three types

1) Raw Material

2) Work-in-progress

3) Finished goods

Prepaid Expenses

Prepaid expenses are the expenses for which the expenses are paid in advance in return for the goods or services availed.

These expenses can also be considered as current assets as the amount is already paid for the goods or services in advance.

For Example, Paid three months of rent in advance.

Accrued Income

Accrued income is the income that is not received for the goods sold or services performed. 

These incomes are the asset of the business as they will increase the cash balance shortly.

For Example, Commission will be paid after three months

Bonus Terms

 Insolvency

Insolvency is a state of business in which the business is not capable of paying its liabilities. 

There are two types of insolvencies:

1) Cash Flow Insolvency: In cash flow insolvency, businesses have enough assets to pay off their financial obligations but not the cash in hand at the moment. Cash flow insolvency can be cured by contacting the lenders to have rescheduled payments.

2) Balance sheet Insolvency: In balance sheet insolvency, businesses do not have enough assets to pay their financial obligation. In this case, the business owner is declared bankrupt.

Accounting Period

The accounting period states that the business should follow a set period with intervals for the inspection of profits and losses and the expenses incurred in the organization in that particular period.

It helps the business to analyze and compare the two periods. It helps create strategies for the next term. Generally, April to March is considered an accounting period in most countries.

For example: If a business owner prepares books of accounts for his business from the last few years, he can analyze the profits and losses, and expenses over the years to look at what should be treated.