The balance sheet also known as the statement of financial position is one of the annual financial reports that exhibit the financial position of a company as at the year-ended.
Share capital and liabilities are both line items of the balance sheet. The statement of financial position is based on the accounting equation, which is also referred to as the balance sheet equation for obvious reasons. The accounting equation is:
ASSETS = LIABILITIES + EQUITY
For small entities, share capital is the owner’s contribution to the business i.e. the amount that the owner has invested in the business.
However, for large organizations, share capital is a part of equity which is raised by issuing shares. It refers to the amount or cash funded by potential investors, who later, after investing, become partial owners of the company.
The share capital is divided into several shares at par value, and each share represents ownership. The funds raised by equity financing are typically used to expand the business.
There are two major types of share capital:
Common Stock – Common or ordinary shareholders are the sole owners of the company and have voting rights at board meetings.
They receive dividends but only when the company earns a profit. In case of liquidation, ordinary shareholders are given the last preference i.e. they receive their share of liquidation profit after paying off all the other stakeholders of the company.
Preference Stock – Preference shareholders may or may not have voting rights. They receive fixed dividends, regardless of the company earning profits. In case of liquidation, preference shareholders have a senior hand over the net assets than the ordinary shareholders.
Liabilities of a company are the cash or amount that it has borrowed from other entities. These are obligations that the company has to perform in the near or later future. Liabilities are classified into two major types on the balance sheet; current liabilities and non-current liabilities.
Current Liabilities – These are short term debts that are to be paid off within a period of 12 months. Accounts payable, interest payable, and rent payable are a few examples of current liabilities.
Non-current Liabilities – These are debts that are to be paid off in the long run i.e. more than a year; for example, a bank loan.
Share Capital vs Liabilities:
Share capital and liabilities are both methods of acquiring cash to provide for the business, but are obtained in extremely different ways.
- Share capital is the owners’ contribution or the funds raised by issuance of shares whereas liabilities are the amounts owed by the company to other entities.
- Money raised through the issuance of share capital is owned by the company, whereas money obtained through credit or loan is the money of the lender that has to be returned along with interest.
- Shareholders receive dividends whereas lenders receive interest. Also, usually in case of current liabilities, no interest is charged.
- In case of liquidation, creditors are paid off from the net assets before the shareholders.
- Shares can be sold and transferred whereas liabilities can not be sold and transferred.