Lecture 7 - Liabilities Flashcards
What is the definition of a liability?
A PRESENT obligiation of the entity arising from PAST EVENTS that is expected to result in an OUTFLOW OF ECONOMIC BENEFIT from the entity.
When is a liability recognised? (2 points)
1) PROBABLE that the outflow will occur
2) The Liability may be RELIABLY MEASURED
How is a Liability Measured? (4 possible ways)
1) Historical Cost/Value
2) Current Cost/Value
3) Realisable Cost/Value
4) Present Cost/Value
What is the definition of a CURRENT LIABILITY?
A liability that arises and is expected to be settled in the same period.
eg bank overdraft, short term accruals etc.
How are Current Liabilities measured? (2 points)
1) Don’t record interest that will be paid but has not yet been accrued.
2) Ignore inflation
What is the JE for Trade and other Payables?
Dr Expense
Cr Accrued Expenses (payables)
What is the JE for Current tax payable?
Dr Income Tax expense
Cr Income tax payable
What is the definition for a Non-current liability?
Not a current liability basically.
eg. long term borrowing suchs as mortgages, interest bearing liabilities etc.
What is the JE for a loan?
Dr Investment Property
Cr Cash
Cr Mortgage Loan
What is the JE to record an interest payment (for one period)?
Dr Interest Expense
Dr Mortgage Loan
Cr Cash
What is a Debenture?
A written promise to pay a principal amount @ a specified time. Making it a non-current liability.
What is the JE to buy a Debenture? (3 steps)
Dr Cash Trust
Cr Application Debentures
Dr Cash @ Bank
Cr Cash trust
Dr Application Debentures
Cr Debentures
What is the JE for Debenture interest payments?
Dr Debenture Interest Expense
Cr Debenture Interest Payable
What is a Provision?
A liability of UNCERTAIN TIMING OR AMOUNT.
eg. provisions for future insurance claims
What is the recognition criteria for a Provision?
1) PROBABLE that benefit will flow FROM the entity
2) Amount may be MEASURED RELIABLY
How are provisions measured?
As a ‘Best estimate’. The measurement must be revised at each reporting date.
What is the JE for a provision?
Dr Expense
Cr Provision
What is a contingent liability? (2 types)
A POSSIBLE OBLIGATION arising from past events, whose existence is confirmed by the OCCURRENCE/NON-OCCURRENCE of an event. i.e. tax payment arising from an audit
OR
A PRESENT OBLIGATION that arises but does NOT meet RECOGNITION CRITERIA (Probable/reliably measured. i.e. defending a claim for unspecified damages
What is the recognition criteria for a Contingent Liability?
They are not recognised! They are disclosed unless the possibility of outflow is low. Then once disclosed they must meet the LIABILITY RECOGNITION CRITERIA
What are three third party collection Liabilities?
1) GST payable -> collected on revenue
2) GST recoverable -> paid on Goods/Services
3) Payment or Refund -> 1 - 2
What is the Journal entry for GST payable?
Dr Accounts Rec
Cr GST payable
Cr Sales Revenue
What is the JE for GST Recoverable?
Dr Repair Expense
Dr GST Recoverable
Cr Accounts Payable
What is the JE for Remitting GST?
Dr GST payable
CR GST Recoverable
Dr OR Cr Cash (GST Payable - Recoverable)
