The Right Side of the Equation
Liabilities and equity answer who financed the assets? The distinction is legal: creditors hold a fixed claim, while owners hold a residual claim.
| Creditors (liabilities) | Owners (equity) | |
|---|---|---|
| Claim | Fixed, contractual | Residual, flexible |
| Payment | Due on schedule | Discretionary dividends |
| Failure | Paid first | Paid last |
| Upside | Capped | Unlimited |
Current liabilities are obligations due within one year. Trade payables are owed to suppliers for goods. Accrued expenses are incurred costs like unpaid wages. Unearned revenue is cash received before delivery—a liability because you still owe the service.
Debt, Equity, and Capital Structure
Non-current liabilities are due beyond one year, including bonds payable, lease liabilities, and deferred tax liabilities. Equity is the owners' stake, defined as .
Share capital is cash invested by owners. Share premium is excess over par value. Retained earnings is cumulative profit minus dividends.
Capital structure decision: More debt increases fixed risk but amplifies returns. More equity lowers risk but dilutes control.