Page 154 - Account 10

13. Terms that Appear in Capital and Liabilities Side of Balance

Sheet (Liabilities and Their Classification)
Liabilities are the claims of the outsiders against the firm, which are payable by the
firm during a short term or long term period. In other words, liabilities are the debts owed
by the firm to the outsiders during a specified time period or to the proprietor at the time
of liquidation. There are various types of liabilities, which maybe categorised as below:

i. Capital/ Permanent Liability
It is the investment of the owner or owners in the business in the form of cash or
kind. This is also, termed as permanent liability in the sense that it is the owners’ claim
against the firm and which is repayable only at the time of liquidation or otherwise at
retirement of a co-owner. The headings that fall under this category are:
Capital Share premium Retained earning Net profit Reserve fund

ii. Long Term Debts
All the liabilities, which are repayable after a series of years. i.e. after more than
a year are termed as long term liabilities. The maturity period of this sort of liabilities
is more than one year. These are also, termed as long term debts. Since such debts are
borrowed for a long time to invest in the business, these are also, termed as borrowed
capital. The following are the examples of long term liabilities:

Loan Secured loan Unsecured loan
Long term loan Mortgages Debentures
Bonds Borrowed capital etc.

iii. Short Term/Current Liabilities
All the liabilities or obligations, which are payable during a short period of time,
usually within one year’s period are known as short term or current liabilities. The
examples are:
Bank overdrafts S/creditors Trade creditors
Bills payables Accounts payables Outstanding expenses
Advance income (receipt) etc.

iv. Provisional Liabilities
There are some liabilities, which are not certain to occur in the future but some sorts
of incidents may create such liabilities. Therefore, some provisions are made to discharge
such liabilities in the future. Provisions for bad debts, provision for tax, provisions for
depreciation, etc. are some examples of provisional liabilities.
14. Important Terms used in a Balance Sheet

i. Drawing
Drawing is the withdrawal of the owner or owners out of their capital from the
business in the form of cash or any kinds of assets. It is either deducted from capital in the
balance sheet or mentioned in the assets side.

154 Aakar’s Office Practice and Accountancy - 10 Final Accounts 155