CA Inter | Equity vs Liability Made Simple | Advanced Accounting | Assets, Liabilities & Equity

Now, let's see what a balance sheet tells us. What do you write in a balance sheet? Assets, liabilities, and equity. What will you say? Assets, liabilities, and equity. Just three things: assets, liabilities, and equity. You might ask, "Sir, what exactly is equity?" You know what you call proprietor's capital, right? When you prepare an individual's balance sheet, what you... wait, one second, one second, I'll take your question after this, child, yes... when you make an individual's balance sheet, don't you call it proprietor's capital? That is called equity. That is not a liability to the company, or rather, that is not a liability to the firm; that's called equity. Now, when you prepare a company's balance sheet, have you heard the term "shareholders' fund"? "Share capital"—had you heard the name? Have you guys heard of "reserves and surplus"? Great. When you combine those two... let's say a company's share capital is 100 crores—you can see it here on the board—and its reserves and surplus is, let's assume, 700 crores, the total becomes 800 crores. This 800 crores, right here, this is the equity of that company; it is the shareholders' fund. So you might ask, "Sir, why don't we call it a liability? Why do we call it equity?" There is a specific distinction between a liability and equity. What is that distinction? Well, the people who hold liabilities can actually demand their money back, but the people who hold equity cannot demand their money from the company. The company will give it to them whenever it decides to—it will give it in the form of dividends, or it will give it in the form of a buyback. We will teach all of this, it's all in your syllabus. This is the core difference between equity and a liability. Liability means there is a "contractual obligation to pay cash." Repeat that: "contractual obligation to pay cash". Write this down in your notebooks, these are all really good terms. Write it wherever you like, but put it in your notebook. The formal definition of liabilities will actually come up later in this same book, but for now, since it's just the first class, just listen and keep it in mind. And what happens with equity? It doesn't have a contractual obligation to pay cash. Okay? So, from today onwards, if anyone asks you what things go into a balance sheet, what will you say? Assets, liabilities, and equity. #BalanceSheet #Assets #Liabilities #Equity #ShareholdersFund #ShareCapital #ReservesAndSurplus #CAIntermediate #AdvancedAccounting #AccountingBasics #ContractualObligation #SudarshanAgrawal