19.5. Valuation of goodwill is difficult. Goodwill will depend on reputation. It is
intangible. It will be incorporated in the Balance Sheet only when it is
raised in the books of accounts, for example, at the time of purchasing a
going concern.- Liabilities
20.1. The three main groups of liabilities are :? Current liabilities
? Fixed liabilities
? Share holders funds(Shareholders are different from person who has given loans to the company. People
who have given loans are not the owners of the company. Shareholders are the owners of
the company.)
- Long term loans from financial institutions are an example of fixed liability.
- Short term loans and overdraft accounts payable are examples of current
liabilities. - The cost of current liabilities will be low when compared to the cost of fixed
liabilities. - Current liabilities and fixed liabilities are called outside liabilities.
- Normally, the current liabilities have to be met within one year.
- Fixed liabilities represent the long-term finance and the current liabilities
represent short-term finance.
20.2. Usually, long term loans are obtained on the basis of property as security.
The property offered as security may be in the form of building, plant and
machinery etc.- Share holders Funds.
21.1. To a company the major portion of money comes from the shareholders.
This will be shown in the Balance Sheet as ‘Capital issued and subscribed’.
It must be within the limits of “Capital Authorized” by law.21.2. The company will pay dividends to its share holders. The dividends will be
paid out of profits.
21.3. The portion of the profits retained in the business without payment to the
shareholders may form ‘Capital reserve and revenue reserve’.21.4. Revenue Reserve emanates from profit from normal business operations.
Capital reserve comes from the amount realized from the sale of fixed assets.
The sale of fixed assets is not part of normal business operations.