What is Liabilities and how relates to business

Liabilities:


Liabilities are the obligation that an entity owes to other persons or entities. For example, credit purchases, bank loans, interests payable, taxes payable, and an overdraft.

The same as assets, liabilities are classified into two types: Current Liabilities and Non-current liabilities. The liabilities are the balance sheet items and they represent the amount at the end of the accounting period.

A current liability is an obligation that is due within one year. In other words, the entity is expected to pay or willing to pay back the debt with one year.

For example, purchase on credit within one month should be recorded as a current liability.

Non-current liabilities are the debt or obligation that due to more than one year or more than twelve months.

For example, long term lease that due in more than twelve months should record in the non-current liability.

Equity:

Equities are the difference between assets and liabilities. The items in equity include share capital, retain earning, common stock, prefer sock, and reserves.

The change of assets and liabilities over the period will affect the net value of equity. You can calculate the net value of equity of an entity by removing liabilities from assets.





The net income or loss from the income statement during the period will be added to the opening balance of retained earnings or accumulated loss.

3) Statement of Change in Equity:

A statement of change in equity is one of the financial statements that show the shareholder contribution, movement in equity and equity balance at the end of the accounting period.

Information that shows is these statements include classification of share capital, total share capital, retain earning, dividend payment, and other related state reserves.

Please noted that the statement of change of equity is the result of the income statement and balance sheet.

Basically, if the income statement and balance sheet are correctly prepared, the statement of change in equity would be corrected too.

4) Statement of Cash Flow:

The statement of cash flow is one of the financial statements that show the movement of the entity’s cash during the period. This statement help users understand how the cash movement in the entity is.

There are three sections in this statement. They are cash flow from the operation, cash flow from investing, and cash flow from financing activities.

For example, cash flow from operating activities helps users know how much cash an entity generates from the operation.

In general, the information will be shown base on the method of cash flow that the entity prepares. It includes direct and indirect methods.

5) Noted to Financial Statements:

Note to Financial Statements is the important statement that most people forget about.

This is the mandatory requirement by IFRS that entity has to disclose all information that matters to financial statements and help users to have a better understanding.

Note or sometimes call disclosure detail the financial information related to the specific accounts. For example, in the balance sheet, you will see the balance of fixed assets.

But detail information of those fixed assets is included not in the statement of financial position. If the users want to learn more about those fixed assets, they need to go to note to those fixed assets.



Questions

Explain five Advantages of Financial Statements

Given the following information related to SISI investment.

Items Amount (TZS0

Cash in hand 10,000,000

Long term liabilities 20,000,000

Cash at bank 30,000,000

Closing stock 7,000,000

Debtors 12,000,000

Creditors 9,000,000

Prepaid salary expenses 3,000,000

Prepaid advertisement costs 1,500,000

Accrued rent expenses 2,500,000

Accrued wages 1,000,000

Land 55,000,000

Required

a. Find the amount of total assets of the business and

b. Capital of the business