Financial Statements: Balance Sheet Liabilities and Equity

Definition: A liability represents a future sacrifice, typically in the form of a cash payment.
Types of Liabilities:
- Accounts Payable (A/P):
  - Arises from the credit purchase of merchandise (for a retailer) or raw materials (for a manufacturer).
- Borrowed Funds:
  - Includes obligations such as bank borrowings and Notes Payable.
- Accrued Amounts:
  - Examples include accrued wages and income taxes.
  - These result from a timing difference: an unpaid expense is reported on the income statement before it is actually paid.
- Advanced Payments from Customers:
  - Often referred to as "unearned revenue."
  - Represents payments received for goods or services not yet delivered or performed.
- Contingent Liabilities:
  - A potential liability that may arise depending on the outcome of a future event.
  - Recorded on the balance sheet when two conditions are met:
    1. It is more likely than not that a future occurrence will result in a material adverse financial impact.
    2. The amount of the potential impact can be reasonably estimated.

Current Liabilities:
- Defined as those liabilities that are scheduled to be paid within one year from the balance sheet date.
- Examples:
  - Accounts Payable (A/P)
  - Current portion of long-term debt (the part of long-term debt due in the next year)
  - Unearned Revenue
  - Notes Payable (especially those arising from a line-of-credit or due within one year)
  - Accrued Compensation (e.g., wages, salaries)
  - Income Taxes Payable
Long-Term Debt:
- Liabilities that are not current; their payment is due in more than one year.
- Examples:
  - Mortgages
  - Bonds Payable
  - Notes Payable (those with maturities greater than one year)

Definition:
- Stockholders' equity is also known as the residual amount. It is what remains after subtracting total liabilities from total assets (\text{Assets} - \text{Liabilities} = \text{Equity}).
- It represents the amount of assets that the owners (stockholders) have a claim to.
Components of Stockholders' Equity:
- Contributed/Invested Capital:
  - Primarily consists of Common Stock, which represents funds directly invested by the owners in exchange for shares.
- Retained Earnings:
  - The accumulated net income of the company since its inception, minus any dividends paid out to shareholders.
  - Represents profits that have been retained and reinvested in the business rather than distributed.
- Treasury Stock:
  - Shares of a company's own stock that it has repurchased from the open market.
  - It is a contra-equity account, meaning it reduces total stockholders' equity.