Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)

Transcription

1 Ibrahim Sameer (MBA - Specialized in Finance, B.Com Specialized in Accounting & Marketing)

2 Definition Define Liabilities?

3 Definition of Liabilities Liabilities represent an obligation of an entity. This obligation needs to be satisfied by the entity through payment of cash or the surrendering of entity s assets or services.

4 Definition of Liabilities According to Malaysian accounting standard FRS 101- Presentation of Financial Statement, a liability shall be classified as current when it satisfies any of the following criteria:

5 Definition of Liabilities (a) it is expected to be settled in the entity's normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it is due to be settled within twelve months after the balance sheet date; or

6 Definition of Liabilities (d) the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date. All other liabilities shall be classified as non-current.

7 Current Liabilities Current liabilities are obligations by an entity that need to be settled using current assets or by creating another current liability within a period of one year.

8 Current Liabilities

9 Bank Overdraft What is Bank overdraft?

10 Bank Overdraft Bank overdraft is a facility given by banks to current account holders that enable the holder to draw cheques larger than the holder s bank balance. An overdraft is indicated by a credit balance in a firm s cash account.

11 Bank Overdraft Bank will charge firm a fixed interest rate for the overdraft amount. The original amount plus the interest must be paid by the current account s holder.

12 Bank Loan Bank loan is also refers to as notes payable represent borrowing made by businesses. Borrowings can be long term or short term. Short term refers to borrowing that needs to be paid within a period of one year.

13 Bills Payables Bill payable is a note issued by one entity, promising to pay another entity. It is usually issued when you as the debtor are unable to pay for your account payable balance to your supplier (creditor).

14 Dividend Payables Dividends payable is liability unique to companies. It arises as a result of the difference in the date when dividend is declared and the date dividend is paid.

15 Long term Liabilities Long term liabilities are obligations of an entity that need to be settled in a period of more than twelve months than the date of reporting. The obligation is settled by giving up (sacrificing) the entity s current assets.

16 Long term Liabilities

17 Long term Bank Loan Long term bank loans (notes payable) are borrowings that needs to be paid within a period of more than twelve months.

18 Current Assets According to Malaysian accounting standard FRS 101 Presentation of Financial Statement, an asset is classified as a current asset when it is:

19 Current Assets In other words, current assets include cash or cash equivalent and other assets that can be converted into cash, and other assets that can be resold or used in manufacturing goods within a period of one accounting year or less.

20 Mortgage Loan Mortgage loans refer to borrowings made by an entity (for example bank), that involves securing loan against an asset. In other word the amount of borrowing is tied against the entity assets (building, vehicle or land).

21 Bonds & Debentures Bonds and debentures are issued by an entity in order to finance its activities. Normally big corporations and government will issue bonds. You might have heard about Islamic bond issued by the HDFC in Maldives, amounting to RVR 50 million and due in November 2013.

22 Bonds & Debentures The issuer will have an obligation to pay the interest payment to the bond holder, normally semi annually until the bond matures. The face value or bond will be paid by the issuer on maturity.

23 Equity It is the owner s residual claims of the business assets after paying off liabilities.

24 Equity of Sole Trader For a single proprietorship the equity section of a balance sheet will have only one account i.e. Capital account. The balance of capital account represents: (a) the original amount contributed by the owner; (b) any increase or decrease as a result of profits or losses;

25 Equity of Sole Trader (c) any increase as a result of additional contribution by owner; and (d) any decrease as a result of drawings made by owner.

26 Equity of Sole Trader

27 Equity of Partnership

28 Equity of a Company Equity component of a company comprises of: (i) shareholder s fund; (ii) retained earnings; and (iii) reserves.

29 Equity of a Company

30 Shareholders Funds Shareholder funds are the par value of shares times the number of shares issued by a company. For example, if a company issues 3 million ordinary shares of RM1 par value each, then the shareholder fund is RM3 million. Let us look at the characteristics of these shares.

31 Ordinary or Common Shares Holders of common shares are the true owner of a company. They have the rights to vote. Ordinary shareholders right to dividend is after preference shareholders. Ordinary share s dividend amount is not fixed.

32 Ordinary or Common Shares In the event that a business turns bad, company do not have an obligation to declare dividends for ordinary shares. However, once a company declares its dividend, the company must fulfill its obligation to pay.

33 Preference Shares Holders of preference share do not have the rights to vote. Preference shares have special rights attached to them, i.e. rights to receive dividends before ordinary shareholders and also rights to the residual assets before ordinary shareholders if the company wind up.

34 Preference Shares The preference shares dividend amount is fixed. Preference shares will be issued with fixed dividend rates. A company has the obligation to pay this dividend regardless whether business is good or bad. Hence, in ratio analysis, preference shares are treated as liabilities rather than equity.

35 Retained Earnings The second component of equity for company is retained earning. Retained earning account is the accumulation of company s net earnings (profit) after tax after distributions to shareholders and/or reserves.

36 Retained Earnings

37 Reserves A company might also create reserves to set aside funds from earnings for the following purposes: (i) to cover themselves from future loses; (ii) to buy fixed assets; (iii) to repay liabilities; and (iv) to buy back their shares.

38 Reserves The most common reserve created is the general reserves, and this will be reported in the equity section of the balance sheet.

39 Equity Component of Company in Summery

40 Q & A