Chapter 12 - Liabilities Flashcards
What is a liability?
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
What is a constructive obligation?
May be established by an entity having established or published policies and practices which creates a valid expectation that those policies or practices will be upheld
What is a legal obligation?
One enforced by operation of law
What is a current liability?
Liabilities which are payable within 12 months of reporting date e.g payables, bank overdraft
What is a non current liability?
Long term liability payable more than 12 months after the reporting period e.g long term bank loan
What is the double entry for a purchase of goods for cash?
Dr purchases/ expenses
Cr cash
What is the double entry for a purchase made on credit?
Dr Purchases/ expenses
Cr payables
What is the double entry when a credit customer makes a payment?
Dr payables
Cr cash
What is a provision?
A liability of uncertain timing or amount
What is the 3 criteria to be met before a provision can be recognised?
1) there must be a present obligation that exists as the result of past event
2) there will be a probable transfer of economic benefits
3) there must be a reliable estimate of the potential cost
What is the double entry for a provision?
Dr expenses
Cr provision
What happens if a provision is not recognised in the financial statements?
Need to be disclosed as a contingent liability in the financial statements
How does IAS 37 s10 define a contingent liability?
A possible obligation that arises from past events or
A probable obligation that arises from past events but the amount of the obligation cannot be measure with sufficient reliability
How does IAS 37 s10 define a contingent asset?
A possible asset that rises from past events and whole existence will be confirmed only by the occurrence or non occurrence of one or more uncertain future events not wholly within the control of the entity
If probability of occurrences is virtually certain >95% what is the treatment for contingent liabilities and assets?
C.I - provide
C.A - recognise