Topic 10: Current Liabilities Flashcards
Characteristics of liabilities?
Present obligation
Arises from past events
Results in an outflow of resources
An entity shall classify a liability as current when?
it expects to settle the liability in its normal operating cycle
the liability is due to be settled within 12 months after the reporting period
it holds the liability primarly for the purpose of trading
Account Payable
- Amounts owed to other entities for products and services purchased on account.
- Time lag between the receipt of services or acquisition of title to assets and the payment for them
- Terms of the sale state the period of extended credit, commonly
Notes payable
-Common form of financing
-Written promises to pay a certain sum of money on a specified future date.
-Arise from purchases, financing or other transactions
-Can be classified as:
short term or long term
interest-bearing or zero-interest bearing
Journal entries for current maturities of long-term debts?
1) Note recorded as long-term
2) Reclassification: Record the portion that is current
Dividends payable
Amount owed by a corporation to its stockholders as a result of board of director’s authorization
Paid generally within 3 months
Undeclared dividends on cumulative preference shares not recognized as liability
Dividends payable in the form of additional shares are not recognized as a liability but reported in equity
Taxes Payable
Sales Tax:
-States assess sales tax on retail sales
-Retailers:
Collect the price of the item sold+sales tax
Pay Sales Tey Payable in less than a year
Income Tax:
- Businesses must prepare an income tax return and compute the income tax payable
- Taxes payable are a current liability
Journal Record for Sales Tax
Smart Touch
① December’s taxable sales totaled $ 10,000.
② Smart Touch collected an additional 6% sales tax ($10,000*0.06=$600 )
DEC 2013: Record cash sales and the related sales tax
CASH (A+) 10’600
Sales Revenue (R+) 10’000
Sales Tax payable (L+) 600
JAN 2014: Payment of Tax Payable
Sales Tax payable (L-) 600
Cash (A-) 600
Employed-Related Liabilities
Amount owed to employees for salaries or wages are reported as current liability:
- Salary
- Wages
- Commission
- Bonus
- Benefits
When to record revenue?
- When service is provided
- When the product is delivered
- When the earnings process is complete
NO WHEN CASH IS RECEIVED!
Accrual Accounting:Expense Recognition Matching Principle
Measure all expenses incured during the period and match the expenses against the revenues earned during the same period.
Matching means expenses are in the same period that the related revenue is recorded. The goal is to properly measure net income (loss)
Prepaid
Prepaid Expenses: Advance payments of expenses
Ex: Rent, Insurance, Supplies
=> recorded as asset
=>adjusting entry: records amount used as an expense
Unearned Revenue: Cash is collected before revenue is earned (also called deferred revenue)
=> recorded as liability
=>adjusting entry: records amount used as revenue
Accruals
Accrued Expenses: Expenses incurred before payment is made
Ex: Salaries, Interest
=>Opposite of a prepaid expense
=>Results in a liability
Accrued Revenues: Revenues earned before cash is received
=> Results in a receivable
Unearned Revenues
Cash received in advance of performing work
Obligation to provide goods or services to the customer in the future
Journal entry for unearned revenues
Smart Touch
Receive $600 in advance on May 21 for a month’s and the work is performed for 1/3
1) Receive cash in advance and record liability (Unearned Service Revenue)
2) Perform the service and adjust the entry ( Earned Service Revenue)
Smart Touch
§ Receive $600 in advance on May 21 for a month’s work
CASH (A+) 600
Unearned Service Revenue (L+) 600
§ As the work is performed for 1/3:
Unearned Service Revenue (L-) 200
Service Revenue (R+) 200
Accrued Liabilities
Journal Entry of a $20,000 note payable signed on May, 2013 paid over four years
Accrued Expenses:
- Expenses that have been incurred, but have not yet been paid
- Have a related unpaid bill (accrued liability)
DEC 2013
Interest Expense (20000*6%*7/12) (E+) 700
Interest Payable (L+) 700
Provisions
Liability of uncertain timing or amount
=>reported as current or non-current liability
=>Common types: Obligations related to litigation
o Warranty or product guarantees
o Business restructurings: termination of a
line of business, closure or relocation of
business
o Environmental damage:
Decommissioning nuclear facilities;
Dismantling, restoring, and reclamation
of oil and gas properties
Contingent
Potential Liability : may or may not become actual liability, depends on a future event
=> NOT RECOGNIZED IN THE FINANCIAL STATEMENTS!
When are provisions recognized?
When all of the following criteria are met:
(a) An entity has a present obligation (legal or constructive) as a result of a past event.
(b) It is probable that an outflow of resources embodying economic benefits willbe required to settle the obligation and
(c) A reliable estimate can be made of the amount of the obligation.
Disclosures for Provisions
§ A company must provide a reconciliation of its beginning to ending balance for each major class of provisions, identifying what caused the change during the period. § Provision must be described and the expected timing of any outflows disclosed. § Disclosure about uncertainties related to expected outflows as well as expected reimbursements should be provided.
Warranty Payable
Warranty claims expected to pay in the future based on estimates
Matching principle: Warranty expense recorded in the same time period of the sale NOT when the company pays the warranty claims.
Smart Touch
§ on June 10, 2013 made sales on account of $ 50,000 subject to product warranties.
§ (on June 10, 2013) estimates that 3% of its products may require warranty repairs [$ 50,000 * 0.03 = $ 1’500$]
JOURNAL ENTRIES:
Account Receivable (A+) 50'000
Sales Revenue (R+) 50'000
COGS (E+) 21’000
Inventoy (A-) 21’000
Warranty Expense (E+) 1'500
Estimated Warranty payable (L+) 1'500
