Liabilities Flashcards
What are liabilities?
Liabilities are obligations that result from past transactions. Similar to assets, they are also classified as current (due within one year) and non-current (due after more than one year).
Liabilities:
- an expected future outflow of resources
- a present obligation of the entity which
- arises from past events
What are current liabilities?
Current liabilities are obligations that are to be paid or settled within one year of the company’s statement date or its operating cycle, whichever is longer. As with current assets, companies use a period longer than one year if their operating cycle is longer than one year.
What are examples of current liabilities?
Bank indebtedness, accounts payable, accrued liabilities, notes payable including bank loans payable, and current maturities of long-term debt.
What is bank indebtedness?
A short-term loan from a bank, typically occurring when a company uses an operating line of credit to cover cash shortfalls.
A liability that comes from when a company uses its operating line of credit to cover cash shortfalls and overdraws its bank account.
What is accounts payable?
Represents amounts owed by the company to suppliers for purchases made on credit (account).
What are accrued liabilities?
Are amounts owed by the company for salaries, interest, sales tax, rent, income tax, and like items.
What are notes payable?
Are amounts owed, often to banks but also to suppliers or others, that are supported by a written promise to repay. Amounts owed to banks are usually known as bank loans payable. It is common to refer to notes and loans interchangeably.
Notes can be current or non-current. Explain.
When a company has a non-current or long-term note or loan payable (for ex, a five-year bank loan), a portion of the loan is often repayable each year. The portion of the payment due to be made within the current year is classified as current maturities of long-term debt. The remainder of the loan is classified as a non-current liability.
How are current liabilities ordered in the statement of financial position?
In the order in which they are expected to be paid; that is, in their order of liquidity by due date.
However, for many companies, the items in the current liabilities section are arranged according to an internal company custom rather than a prescribed rule. And some international companies list current liabilities in a reverse order of liquidity, similar to current assets.
What are non-current liabilities? Give examples.
Obligations that are expected to be paid or settled after one year. Examples: 1) Notes payable, including bank loans payable, mortgages payable, and bonds payable. 2) Lease obligations 3) Pension and benefit obligations 4) Deferred income tax liabilities
What are mortgages payable?
Mortgages payable are similar to long-term notes but have property (e.g., a house or a building) pledged as security for the loan.
What are bonds payable?
Bonds payable are used by large corporations and governments to borrow large sums of money.
What are lease obligations?
Lease obligations include amounts to be paid in the future on long-term rental contracts used for equipment or other property.
What are pension and benefit obligations?
They are amounts companies owe past and current employees for retirement benefits.
What are deferred income tax liabilities?
They represent income tax that is expected to be payable in a later year or years when a company prepares its future corporate income return.
