Chapter 10 Flashcards
Define certain liabilities
Liabilities with a known amount, payee and due date.
Define account payable
When an entity buys goods from a supplier with the agreement to pay at a later date
How do companies account for unearned revenues that are received before goods are delivered or services are performed?
- When a company receives the payment in advance, it debits CASH and credits a current liability account, UNEARNED REVENUE.
- When the company provides the goods or performs a service, the performance obligation is satisfied, and the company recognizes the revenue as it debits UNEARNED REVENUE and credits a [REVENUE] ACCOUNT. Replace revenue with what it is for… subscription, tickets, services, etc.
Unearned revenue is reported as a current liability.
Define prepaid asset.
The cash is paid out before the service or goods are received.
What is an operating line of credit?
Companies have been pre-authorized by the bank to help manage temporary cash shortfalls when a current asset does not turn into cash at the exact same time that current liabilities must be paid.
How to record bank overdraft as a journal entry?
The cash account will show a negative balance. No special entry is required to record overdrawn amounts.
What is short-term notes payable?
Notes payable are obligations tin the form of written promissory notes. They are used to provide formal proof to the lender in case of legal remedies. Usually require the borrower to pay interest.
Interest payable is shown separately from note payable.
How do you record sales tax on a journal entry?
Taxes are a liability.
Sales minus taxes are credited and then taxes are credited separately as HST/PST/GST Payable.
Taxes are not reported as revenue, but a portion of the Sales.
Define provision
A liability that exists but the amount and the timing of the settlement are uncertain. AKA estimated liabilities.
Such as product warranties, customer loyalty programs and gift cards.
How to record customer loyalty revenue?
CASH - debit
SALE - credit (Amount related to revenue)
UNEARNED REVENUE - credit (amount related to loyalty points/program)
Unearned revenue is a liability recorded on the balance sheet.
What is breakage?
A term used to describe gift cards that will not be redeemed.
If an entity is able to estimate the breakage, a portion of the revenue related to the breakage is recognized when the gift card is redeemed.
This means that when a customer makes a gift card redemption, an entity records the actual gift card sale and reduces its gift card liability. It also recognizes the estimated revenue related to its gift card breakage.
Define contingency liability
A possible obligation resulting from a past event.
Under ASP, a liability for contingent loss is recorded. If both the following conditions are met:
1. The contingency is likely (change of high occurrence).
2. The amount of the contingency can be reasonably estimated.
