Liabilities can be classified as current liabilities and long-term liabilities:
Current liabilities: Claims by creditors or lenders payable almost immediately or within the next year, for goods or services bought by the firm or short-term loans.
Long-term liabilities: Claims by lenders payable in the medium to long term, such as loans with a repayment schedule of more than one year. Total Liabilities are the sum of Current Liabilities and Long-Term Liabilities.
Additional assets generated by trading activities or earnings or profits are either paid out as dividends to the owners or retained in the business to increase its level of operations and generate more wealth for the shareholders. They could also be used to provide cover against unexpected cost overruns that may threaten the survival of the firm.
Retained earnings are thus an additional source of funds for the business.
The balance sheet is a representation of the accounting equation. It is used in entrepreneurial accounting to clearly see the state of a company’s finances.
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