Accg for Liability & OE

8/2/2019 Accg for Liability & OE

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Topic 7

ACCOUNTING

FOR LIABILITY

AND

OWNERS EQUITY


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1. Current Liability

An obligation that needs to be settled within one year.

Creditors

An amount owed to the supplier, for stock purchased.

Unearned Revenue

Cash received and recorded before the services beingperformed or stock delivered.

Accrued Expense

An expense charged but still unpaid or recorded at theperiod in which the financial statement is prepared.


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2. Long Term Liability

An obligation that need to be settled in a period of more

than one year.

Example: Long-term loan, Bond and Mortgage.

Issuing Procedure:

number of bond to be authorized

total face value: amount of principal the issuer must

pay at the maturity date. contractual interest rate: the interest paid by the

borrower and the investor received.


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How do we account or record the Long-termLoan?

Example:On 1 Jan 2007, Truth Company issued a

1,000 unit of bond for 10 years at RM1,000(9% interest) at 100% face value.

i. To record the principal

1 Jan 2007:

Dr. Cash 1,000,000

Cr. Bond Payable 1,000,000

(To record sale of bond at face value)


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ii. To record the interest payable.

Assume the interest is paid twice a year

i.e. 1 January and 1 July 2007.

1,000,000 x 9% x 6/12 = RM45,000.

1 July 2007

Dr. Interest expense 45,000

Cr. Cash 45,000

(To record payment of bond interest)


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Adjusting Entry: 31 December 2007

Dr. Interest expense 45,000

Cr. Interest payable 45,000

(To record interest payable)

When the interest is paid on 1 Jan 2008Dr. Interest payable 45,000

Cr. Cash 45,000

At the Year 10:(maturity date)

Dr. Bond payable 1,000,000

Cr. Cash 1,000,000


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LOANS PAYABLE BY

INSTALMENT Entities may borrow money from a single

borrower in the form of loan.

It is common for such loans to be repayableby instalment, e.g. mortgages.

A mortgage is a loan secured by a charge

over property. If the borrower is unable to repay the loan,

the lender may sell the property and use theproceeds to repay the loan.


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Accounting for Loans Payable by

Instalment Mortgage payments consist of:

Interest expense and

Reduction of loan liability

Journal entry to record mortgage payment

Mar 31 Interest Expense 1 000

Loan Payable 9 000Cash at Bank 10

000(To record loan repayment

for March)


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Components of Long-Term Debt

Entities often have a portion of long-termdebt that falls due within the coming year.

This portion of the long-term debt should be

classified as a current liability. The remainder will be classified as a non-

current liability.

An adjusting entry is not necessary torecognise the current portion of the liability.It is recognised by proper classification on

the balance sheet.


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Owners Equity

Definition:The ownership claims towards the asset owned by

the business.

Factors affecting the owners equity:

Additional capital: increased the amount of owners

equity.

Drawing: reduced the amount of owners equity

Profit and Loss:

Profit increase the owners equity

Loss decrease the owners equity

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