When Liability Is Greater Than Asset In Balance Sheet

When The Liabilities Of A Company Are Greater Than The Assets In Balance Sheet

We barely solve questions in balance sheet and discover that the balance of liabilities are greater than that of the assets. People might even think that their answers are wrong or the question is not correct or up to standard.

ALSO READ: Meaning of Assets

The balance sheet is a statement that shows the assets and liabilities of a company. It tells bus how much a company owns i.e Assets and how much it owes i.e liabilities. When you come across answers like that in your balance sheet, make sure all of your balance sheet accounts are in balance. Your cash, accounts payable, accounts receivable, etc, etc. Once everything is in balance then you subtract the liabilities from the assets and the difference is owners equity.

First year accounting students are taught that to keep in balance the following formula must be adhered to:
Assets=Liabilities + Owners Equity

So what exactly is Owners Equity?
In the normal course of business we would expect that Owners Equity is where we book Retained Earnings. Now we define Retained Earnings(RE). RE = the accumulated Net Income - all previous years earnings combined. A separate line follows indicating YTD earnings. When RE is = O and YTD earnings are operating at a loss, then you would expect that Assets are less than Liabilities. However, this is the line that keeps the books in “balance”.

To illustrate:
Assets = 100
Liabilities = 150
Owners Equity = -50
or 100 = 150–50

Typically, if this does happen, we would expect the company is about to file for bankruptcy or Chapter X. Chapter X allows the company to go to its creditors and submit a plan which hopefully will give them time to get their act together.

Post a Comment