302590 Flashcards
The following information pertains to Dash Co.’s utility bills:
Period Covered Amount Date Paid
April 16–May 15 $5,000 June 1
May 16–June 15 6,000 July 1
June 16–July 15 8,000 August 1
What is the amount that Dash should report as a liability in its June 30 balance sheet?
$6,000
$14,000
$7,000
$10,000
$10,000
Liabilities of a company represent benefits incurred by a company that have not been settled. As of June 30, the company has incurred a benefit for the period May 16 to June 30 without settling with the utility company. The period from April 16 to May 15 is not included because the liability has already been settled. The outstanding liability is as follows:
Period Covered Amount
April 16–May 15 $ 0
May 16–June 15 6,000
June 16–July 15 4,000 ($8,000 unpaid × 1/2 June month)
Total liability $10,000
Accrual
Accrual is the accounting process that recognizes the value of assets or liabilities and related revenues, expenses, gains, and losses, whether received or paid in cash or by credit, barter, or other means (SFAC 6.141). Accrual involves future cash receipts and payments and may involve the use of an estimate as to the value of a transaction.
Examples include purchases and sales of goods or services on account, other expenses such as interest, rent, wages and salaries, and taxes that have not yet been paid in cash.
IRC Section 451
Balance Sheet
Also called a statement of financial position, a balance sheet is a summary of assets, liabilities, and owner’s equity for a company as of a specific date. It is considered to be a snapshot of the organization’s financial position at a point in time.
Liabilities
Liabilities are probable future sacrifices of economic benefits arising from present obligations of the entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. (SFAC 6.35–.42 and .192–.211)
Essential characteristics, all three of which must be present, are as follows:
- A present duty or responsibility to one or more other entities entails settlement by probable future transfer or use of assets at a specified determinable date, on occurrence of a specified event, or on demand.
- The duty or responsibility obligates the entity, leaving it little or no discretion to avoid the future sacrifice.
- The transaction or event obligating the entity has already occurred.
Most liabilities stem from human inventions—financial instruments, contracts, laws—that are commonly embodied in legal obligations and rights with no existence apart from them. Liabilities permit delay—delay in payment, delay in delivery, etc.
Liabilities are changed both by the entity’s transactions and activities and by events that happen to it.
“Valuation accounts,” which increase or decrease the carrying value of assets, are part of the related asset and are not liabilities, or assets, in their own right.
In governmental accounting: Liabilities are defined as present obligations to sacrifice resources that the government has little or no discretion to avoid. (GASB Concepts Statement 4.17)
2270.01
Liabilities are defined in SFAC 6 as “probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.”
2270.02
For a liability to be recognized (recorded), it must arise from the occurrence of some critical event in the past from which a benefit (which may be negative, as in the case of a liability for injuries suffered by a customer on the enterprise’s premises) has been received (i.e., at least one critical event has already occurred and the benefit received).
2270.03
A second critical event may be necessary in some cases for a liability to be recognized. For example, in the case of product warranties, the first critical event is the issuance of the product warranty at the time of sale. The benefit received in the past (as of the time of sale) is the excess of sales over what they would have been without the warranty. The second critical event is the product proving to be defective, for without this event the enterprise will not experience any outlay of cash or other resources. The amount may or may not be subject to reasonable estimation.
2270.04
In other cases, there may be no second critical event. For example, when employees have earned wages (i.e., the enterprise has received the benefit of their work), no future critical event is necessary for a liability to be recognized. The amount in this case is usually known.
2270.05
The concept of a second critical event is drawn from the underlying theme of FASB ASC 450-10.
2270.06
For a liability to be recognized, a critical event must have occurred in the past and the enterprise must have received a benefit (though perhaps negative). Liabilities and the appropriate accounting treatment can be categorized as follows:
