Sources of the Firm in a Balance Sheet

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The balance sheet consists of assets and liabilities of any firm. The assets are called as the uses of the firm and the liabilities are called as the sources of the firm. Sources of the firm: (Debts or liabilities): The debts or liabilities are the claims of the outsiders against the assets of the firm. The liabilities refer to the amount payable by the firm to the claimholders; i.e. the amount owed by the firm to other parties. For an obligation to be recognized as a liability, it must meet three requirements. i) Be expected to lead to a future cash outflow; ii) The firm cannot avoid the obligation and iii) The transaction giving rise to the obligation must have already happened The liabilities may be classified on the basis of payment commitments into long term liabilities and current liabilities. The long term liabilities include the capital, reserves and the debts incurred by the firm, which are not payable during a period of next one year. So the long term liabilities are those obligations of the firm which are not to be discharged during the next one year. The long term liabilities may include the bonds and debenture, mortgaged loans, loans from financial institutions etc. The long term liabilities thus, represent the long term borrowings of the firm. The current liabilities, on the other hand, are those liabilities which the firm expects to pay within a period of one year. The current liabilities relate to the current assets of the firm in the sense that the current liabilities are paid out of the realizations of current assets. The current liabilities (and current assets also) relate to the operating cycle of the firm. The current liabilities are expected to be discharged within an operating cycle of the firm. The current liabilities may include payable (creditors and bills), outstanding expenses, bank overdraft, provision for tax etc. Shareholders equity: The shareholders' equity represents the...
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