Question

We discuss ways that organizations raise capital other than day to day operations. Internal and external factors influence the decision of an organization to issue stock or bonds so it is important to understand the differences between stockholder’s equity and liabilities. What is one difference between liability and equity accounts and how is each type of account presented on the balance sheet?

Answer 1

The amount raised from issuing stock goes to the stockholder's equity. They represent owners of the company. They may affect the decision making process of the company. They are entitled for dividends which are largely based on profitability of the company.

The amount raised from bonds represent liabilities of the comapny. They are not he owners. They are just like other creditors but more secured. They do not directly impact the decision making process of the company unless their rights or liabilities are affected. They are entitled for fixed rate of interest irrespective of profits of the company.

The Equity accounts are represented just below the liabilities head in the Balance Sheet.

The Liability accounts are presented above the equity section in the Balance Sheet.