Liability and Stockholders’ Equity Accounts

Liability Accounts

A company’s liability accounts appear in the chart of accounts, general ledger, and balance sheet immediately following the asset accounts. In the general ledger, the liability accounts will usually have credit balances.

Note: Liabilities are a company’s obligations. They are the amounts that the company owes. Liabilities also include amounts received from customers in advance of being earned.

Here are some examples of liability accounts:

• Short-term Loans Payable
• Current Portion of Long-term Debt
• Accounts Payable
• Accrued Expenses
• Unearned or Deferred Revenues
• Installment Loans Payable
• Mortgage Loans Payable

Descriptions of liability accounts

The following are brief descriptions of some common liability accounts.

Short-term Loans Payable
This account will report the amount of loans which will be due within one year of the date of the balance sheet.

Current Portion of Long-term Debt
This account or line description reports the principal portion of a long-term debt that will have to be paid within one year of the date of the balance sheet. (The portion of the debt that is not due within one year is reported as a noncurrent liability.)

Accounts Payable
Accounts Payable is the account containing the amounts owed to suppliers for invoices that have been approved and entered for payment. The balance in this account reports the amount of those invoices which are unpaid.

Accrued Expenses/Liabilities
Under the accrual method, the amounts in this account are owed but have not yet been recorded in Accounts Payable. This account could include the vendor invoices awaiting processing, employee wages and benefits earned but not yet recorded, and other expenses incurred but not yet recorded.

Unearned or Deferred Revenues
Unearned revenues reports the amounts received in advance of having been earned. For example, if a law firm requires that a client pay $4,000 in advance for future legal work, the law firm will record the cash of $4,000 and also the liability to deliver $4,000 of legal services. The law firm cannot report the $4,000 as revenue until it is earned. This liability account could have the title Unearned Revenues or Deferred Legal Fees. As the legal services are performed (earned), the law firm will reduce the liability account and will report the amount as revenues.

Installment Loans Payable
Installment loans are loans that require a series of payments. A common example is a three-year automobile loan that requires monthly payments. The principal due within one year of the balance sheet date will be reported as a current liability and the remainder of the principal owed will be reported as a noncurrent liability. (The future interest is not recorded as a liability, since it is not due or payable as of the date of the balance sheet.)

Mortgage Loans Payable
Mortgage loans are usually long-term loans with real estate pledged as collateral. The principal due within one year of the balance sheet date will be reported as a current liability and the remainder of the principal owed is reported as a noncurrent liability. (The future interest is not recorded as a liability, since it is not due or payable as of the date of the balance sheet.)

Stockholders’ Equity Accounts

The stockholders’ equity accounts of a corporation will appear in the chart of accounts, general ledger, and balance sheet immediately following the liability accounts. In the general ledger most of the stockholders’ equity accounts will have credit balances. The following are brief descriptions of typical stockholders’ equity accounts.

Paid-in Capital
Paid-in capital is a subheading within stockholders’ equity which indicates the amount paid to the corporation at the time that shares of stock were issued. Paid-in capital is also referred to as permanent capital. Every corporation will have common stock and a small percentage of corporations will have preferred stock in addition to common stock.

The paid-in capital accounts report the amounts received when the corporation’s stock was issued. Often there are two accounts for the common stock:

• Par value of the common stock, and
• Paid-in capital in excess of the par value of the common stock

If a corporation also issued preferred stock, there will also be two additional accounts.

Common Stock
If a corporation’s common stock has a par value or a stated value, only the par or stated value of the shares issued will be recorded in this account. However, if a corporation’s common stock has neither a par value nor a stated value, the entire amount received by the corporation at the time that the shares were issued will be recorded in this account.

Paid-in Capital in Excess of Par Value – Common Stock
When a corporation issues common stock, the amount received minus the par value or stated value is recorded in this account. (The par value of common stock is recorded in the account Common Stock.)

Retained Earnings
Generally, the amount of a corporation’s retained earnings is the cumulative amount of earnings (net income) since the corporation was formed minus the cumulative amount of dividends that have been declared since the corporation was formed.

The current accounting period’s earnings (or net income) will be added to this account and the current period’s dividends will be deducted.

Note: Revenues will cause retained earnings to increase, while expenses will cause retained earnings to decrease.

Retained earnings is a component of stockholders’ equity, but it is separate from paid-in capital. Hence, the amounts reported under retained earnings are not considered to be permanent capital.