LIABILITIES Flashcards
What is a liability?
a present obligation of the entityarising from past events, expected to result in an outflow from the enterprise of resources embodying economic benefit
What is an obligating event?
event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation
What is a legal obligation?
An obligation that derives from contracts or legislation or another operation of law
What is a constructive obligation?
an obligation that derives from an entitiy’s actions: past practice, published policies, accepting certain responsibilities
What is the difference between legal and constructive obligation?
A legal obligation is due to some sort of operation of law whereas a constructive obligation arises from an entity’s past actions
What is the transfer of economic benefits?
The settlement of a liability results in an outflow of resources that embody economic benefits (usually cash & equivalents)
What is the recognition criteria of a liability?
If outflow of resources (like cash) is likely
If cost/value of the obligation can be meassured reliably
what is the process of contingency?
if the likelihood of an outflow of resources ocurring is probable and measurement is estimable: record and disclose the liability
if the likelihood of an outflow of resources ocurring is probable and measurement is not estimable: disclose the liability
if the likelihood of an outflow of resources ocurring is reasonably possible: disclose the liability
if the likelihood of an outflow of resources ocurring is remote. nothing
What happens if an obligations fits the definition of a libility but fails to meet the recognition criteria?
It is recorded as a contingent liability
Where are contingent liabilities recorded?
not presented as a liability in the BS but disclosed in the notes to the financial statements
Current liability recognition criteria
Item meets definition of a liability, sufficient evidence that the liability has been created, the cost/value of the item can be measured reliably (liability recognition)
- expected to be settled within the entity’s normal operating activity
- held primarily for the purpose to be traded
- due to be settled within the next 12 months after the BS date
What are the most commonly current liabilities?
Those that affect expenses:
- accounts payable
- ST debt (notes payable)
- Current LT debt
- Unearned revenue or deferred credits
- other accrued liabilities
How do you record accounts payable?
Debited when a company pays on its account
Credited when a company receives goods or services on credit
What type of liability is accounts payable?
Accrued liabilities: incurred but not yet paid
What is the document that initiates the bookkeeping entries?
The supplier’s invoice
