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
Who’s the trade creditor?
the supplier that provides goods and services to customers on credit terms
what is the difference between inventories and stock of goods
Stock of goods is the supply of finished goods ready for sale whereas inventories can also include raw materials and wips
