Liabilities and Owners' Equity

The firms' liabilities are separated into two groups—current and long term—on the balance sheet. These liability accounts and the owners’ equity accounts complete the balance sheet.

Current Liabilities.

A firm's current liabilities are debts that will be repaid within one year. Northeast Art Supply purchased merchandise from its suppliers on credit. Thus its balance sheet includes an entry for accounts payable. Accounts payable are short-term obligations that arise as a result of making credit purchases.

Notes payable are obligations that have been secured with promissory notes. They are usually short-term obligations, but they may extend beyond one year. Only those that must be paid within the year are listed under current liabilities.

Northeast also lists salaries payable and taxes payable as current liabilities. These are both expenses that have been incurred during the current accounting period but will be paid in the next accounting period. Such expenses must be shown as debts for the accounting period in which they were incurred. For Northeast Art, current liabilities total $70,000.

Long-Term Liabilities Loan

Long-Term Liabilities Loan are debts that need not be repaid for at least one year. Northeast lists only a $40,000 mortgage payable inthis group. Bonds and other long-term loans would be included here as well, if they existed. As illustrated in Figure 3.1 current and long-term liabilities total $110,000.

Owners' Equity

For a sole proprietorship or partnership, the owners’ equity is shown as the difference between assets and liabilities. In a partnership, each partner's share of the ownership is reported separately by each owner's name. For a corporation, the owners' equity (sometimes referred to as shareholders' equity) is shown as the total value of its stock plus retained earnings that have accumulated to date.

Northeast Art Supply has issued only common stock. Its value shown as its par value ($15) times the number of shares outstanding (10,000). In addition, $80,000 of Northeast's earnings have been reinvested_: in the business since it was founded. Thus, owners' equity totals $230,000.

As the two grand totals show, Northeast's assets and the sum of its liabilities and owners' equity are equal to $340,000.