The Nature of Liabilities A. Definitions of Liabilities Liabilities are probable future sacrifices...

The Nature of Liabilities

A. Definitions of LiabilitiesLiabilities are probable future sacrifices of economic benefits arising from present obligations of particular entity to transfer assets or provide services to other entities in the future as result of past transactions or events.

B. Characteristics of a Liability

1) It is a present obligation that entails settlement by probable future transfer or the use of cash, goods, or services

2) It is an unavoidable obligation3) The transaction or event creating

the obligation has already occurred

C. The Types of Liabilities1) Current liablities

Current liabilities are obligations which liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities or due to within shot time usually within one year.

2) Long Term DebtLong term debt are liabilities that are due to over one years.

CURRENT LIABILITIES

Transactions caused by current liablities are:1. Receiving goods or services prior to make

payment2. Receiving payment prior to deliver goods or

services

The examples of current liablities are:1 Account payable/trade account

payable refinanced 7 Current maturities of long term

debt

2 account payable refinanced 8 Short term obligatio xpected to be refinanced

3 Taxes payable 9 Dividends payable

4 Interest payable 10 Customer advances and deposits

5 Wages Payable 11 Income taxe payable

6 Notes payable

ACCOUNTING FOR CURRENT LIABILITIES

(in Rp)

Description Reff. Debit Credit

2008July 10 Merchandise

Inventory 10,000,000

Account Payable 10,000,000

Date

1. Account payable/trade account payable Liablities emerge from merchandise purchasing for resale orThe amount owed to others for goods, supplies, or services purchased on open account.Ex: Assume that on July, 10, 2008 Boys Company purchased merchandise from Trade Company Rp. 10.000.000, term 2/10,n/30, FOB DestinationTransactons above record as follows;

2. Unearned rentLiabilities emerge from the receipt of rent in advance

3. Taxes payable The amount of taxes owed to governmental units

4. Interest payableThe amount of interest owed on borrowed funds

5. Wages payableThe amount owed to employees

ACCOUNTING FOR CURRENT LIABILITIES ACCOUNTING FOR CURRENT LIABILITIES

1. Account payable/trade account payable

• Liablities emerge from purcahes of merchandise for resale

• The amount owed to others for goods, supplies, or services purchased on open account.

• Example : Assume that on July, 10, 2008 Boys Company purchase merchandise from Trade Company Rp. 10.000.000, term 2/10,n/30, FOB Destination

• The entry to record is:Description Reff. Debit Credit

2008July 10 Merchandise Inventory 10,000,000

Account Payable 10,000,000

Date

2. Unearned revenue- Liabilities arising from the receipt of cash in advance - Accounting treatment for unearned revenue are follows: 1. When the advance is received , Cash is debited,

and current liability account identifying the source of unearne reenue credited

2. When the revenue is earned, the unearned revenue account is debited, an earned revenue account is credited- Example : Assume that on August, 10, 2008 Permata

Airlines, Co sells 100 tickets at Rp. 500.000 each for flying at Oct, 25, 2008

- The entry for record the sales of tickets is:(in Rp)


2008August 10 Cash 50,000,000

Uneaned tickets revenue 50,000,000

Date

• The entry to record services which completed to customers (in Rp)


2008Oct 25 Unearned ickets revenue 50,000,000

Ticktes revenue 50,000,000

Date

3. Taxes Payable• The amount of taxes owed to governmental units• The tax is expressed as stated percentage of the

sales price• Example :

Assume that on August, 10, 2008 Regent Mart, sell merchandise Rp. 28.000.000 an sales taxes 10%.

(in Rp)


2008August 10 Cash 30,800,000

Sales taxes payable 2,800,000 Sales 28,000,000

Date

• The entry for record the sales of merchandise is:

4. Notes Payable

• Notes payable is obligation in the form of written promissory notes

• It is often used instead of account payable• Example : • Well Mart, Co agrees to borrow Rp. 100.000.000

from BCA Bank. On Oct, 1, 2008, Well Mart , Co sign a Rp. 100.000.000, 12%, 4-month notes.

• The entry for record the transaction is:

(in Rp)


2008Oct 1 Cash 100,000,000

Notes Payable 100,000,000

Date

5. Interest payable

• The amount of interest owed on borrowed funds• Example:• If Well Mart, Co must prepare financial statement

Des, 31, 2008, this company should recognize interest expense that is not due to.

• The adjusment entry for recording the interest expense is:

(in Rp)


2008Des 31 Interest expense 3,000,000

Interest Payable 3,000,000

Date

Note : calculation accrued interest Rp. 100.000.000 x 3/14 x 12% = Rp. 3.000.000

6. Current maturities of long-term debt • It is long term debt due within one year• It is not necessary to prepare an adjuting

entries to recognize the current maturities of long term debt, but directly presented at balance sheets as current liablities.

7. Dividends payable • It is amount owed by company to it stockholders

as a result of board director’s authorization.• It happens at the date of declaration of dividens.• Example:• On January, 25, Well Mart, Co declare to give

dividen for stockholders Rp. 450.000.000 with will bepaid at Feb, 20, 2008.

(in Rp)


2008Jan 25 Retained Earning 450,000,000

Dividen Payable 450,000,000

Date

8. Customer advances and deposits They are deposits received from customer to guarantee performance of contrac or service or as guarantees to cover payment of expected future obligation. For example, Aqua company may receive deposits from distributors as guarantees for possible damage to company’s property – the water containers

9. Income taxes payable

The company’s income taxes determine on based incomes they earned during one period and usually paid three months latter from the end period.

For example, at Dec, 31, Astira,Co income taxes is not yet paid Rp. 665.000.000. The adjusment entry for record the interest expense is (in Rp)


2008Dec 31 Income Taxes Expense 665.000.000

Income Taxes PayablePayable

665.000.000

Date

10. Wages Payable • At the date of financial reporting, the company

sometimes is not paid salary or wages of their employees. Instead they have been performed services for company.

• The company should recognized the expenses of wages or salary that is not paid

• The adjusment entry for recording the interest expense is:

(in Rp)


2008Dec 31 Wages and Salary Expense xxx

Wagesand SalariesPayablePayable

xxx

Date

• In the business that has several thousand creditors or costumers that need information about the balance amount payable to each creditor or amount owed to individual costumer.

• To track individual balances, the company uses a subsidiary ledger.

• A subsidiary ledger is a group of account shared common characteristic (for example all costumers)

• Two common subsidiary ledgers are:

1. The account receivable (or costumers’) ledger which accumulates transaction data with individual costumer.

2. The account payable (or creditors’) ledger which accumulates transaction data with individual costumer.

• The general ledger account that summarizes subsidiary ledger data is called a control account.

• Each general ledger control account balance must equal the composite balance of the individual accounts in the related subsidiary ledger the end of an accounting period.

• Relationship of general ledger and subsidiary accounts

General Ledger

Subsidiary Ledgers

Cash

Customer A

Customer B

Customer C

Creditor X

Creditor X

Creditor X

Account Receivable

Account Payable

Owner’s Capital

Accounts Payable Subsidiary Ledger

Accounts payable is a control account

ANDA

Date Ref Debit Credit Balance

2008Jan 10 6.000 6.000

19 4.000 2.000

BANASA


2008

Jan 12 3.000 3.000

21 3.000 0

GIOVANI


2008

Jan 20 3.000 3.000

29 1.000 2.000

ANDA


2008Jan 10 6.000 6.000

19 4.000 2.000

BANASA


2008

Jan 12 3.000 3.000

21 3.000 0

GIOVANI


2008

Jan 20 3.000 3.000

29 1.000 2.000

GENERAL LEDGER

ACCOUNTs PAYABLE


2008Jan 31 12.000 12.000

31 8.000 4.000

GENERAL LEDGER

ACCOUNTs PAYABLE


2008Jan 31 12.000 12.000

31 8.000 4.000

The subsidiary ledger is separate from the general ledger

Relationship Beetwen Ledger

GIDate Account Titles and Explanation Ref Debit Credit

1996May 31 Account Payable-Fabor and son 25/√ 500

Purchase returns and Allowances 73 500 (Receivable credit for returned goods)

Karns Wholesale SupplyGeneral Journal

GIDate Account Titles and Explanation Ref Debit Credit

1996May 31 Account Payable-Fabor and son 25/√ 500

Purchase returns and Allowances 73 500 (Receivable credit for returned goods)

Karns Wholesale SupplyGeneral Journal


1996May 14 PI 6,900 6,900

23 CPI 6,900 ………… 26 PI 8,700 8,700 31 GI 500 8,200

ACCOUNT PAYABLE SUBSIDIARY LEDGER

Fabor and SonDate Ref Debit Credit Balance

1996May 14 PI 6,900 6,900

23 CPI 6,900 ………… 26 PI 8,700 8,700 31 GI 500 8,200


Fabor and SonNo. 25


2008May 31 PI 63,900 63,900

31 CPI 42,600 21,300 31 GI 500 20,800

No. 73Date Ref Debit Credit Balance

2008May 31 GI 500 500


Fabor and Son

Purchase Returns and Allowances


2008May 31 PI 63,900 63,900

31 CPI 42,600 21,300 31 GI 500 20,800


2008May 31 GI 500 500


Fabor and Son

Purchase Returns and Allowances

Journalizing and Posting the General Ledger

CONTINGENT LIABILITIES

•Contingent liabilities is a potential liabliy that may become an actual liablity in the future

•Guidelines to report contingent liabilities

1. If the contingency is probable – if it is likely to occur- and the amount can be reasonably estimated, the liability should be recorded to the account

2. If the contingency is reasonably probable – if it is could happen-then it need be disclosed only in the notes accompanying the financial statements

3. If the contingency is remote – if it is unlikely to occur – it need not be recorded or disclosed

• Recording a Contingent Liability

• The example of contingent liablities is product warranties .

• The accounting for warranty cost is based on the matching principle whichever the estimated cost of honoring product warranty contracs should be recognizea as an expense

• Assume that The Plasa Electronic, Co sells 100 washing machines at Rp. 1.500.000 for each during 2008. The selling price includes one-year warranty on parts. It is expected that 5 unit of product sold (5%) will be defective and the average warranty repair cost will be Rp. 150.000 per unit. In the period of sales, warranty contracs are honored on 3 unit with total cost Rp. 450.000.

• Computation estimates warranty liablitty as follows: Number of unit sold 100Estimated rate of defective units 5%Total estimated defectve units 5Average warranty reapir cost Rp. 150.000Estimated prodct warranty liability Rp. 750.000

• The adjusment entry for recording accrues warranty cost is:


2008Dec 31 Warranty Expense 750,000

Wages and Salaries PayableEstimated Wararnty Liability

750,000 (to accrue estimated warranty costs)

Date

•The entry for recording repair cost occurs during the year ( 3 units are repair) is: (in Rp)


2008Dec 31 Estimated warranty Liability 450,000

Repairs Parts/Wages Payable 750,000 (to record honoring of 3 waranty contract on 2008sales)

Date

PRESENTATION OF CURRENT LIABILITIES

Current Liabilities (in million rups)Notes Payable 145Account Payable 231Sallaries Payable 422Taxes Payable 356Interest Payable 265Long-term Debt due to within one year 1.567Total Current Liablities 2.986

BALANCE SHEETSTAR ROCK, CO

PER DEC, 31, 2008

LONG TERM LIABILITY

• Long-term debt consists of probable future sacrifies of economic benefits emerge from present obligations that are not payable within a year or the operating cycle of the company, whichever is longer.

• Long term liabilities commonly include:1. Bonds payable • Bonds are a written promisses to pay specified

sums of money at specified times • Bonds represent a promise to pay:

A. A sum of money at designed maturity date, plus

B. Periodic interest at a specified rate on maturity amount • The parties who interested in bondings are:

1. Bondholders (creditors/lenders)2. Bonds issuer (debitors/borrower)

2. Mortages payableIt is a loan or note that has specific assets of the company (land and buildings, for example) pledged as security for repayment

3. Pension liabilityIt is obligation to employees under a pension plan, obligation for employees compensation in the form of pensions to be paid in the future

4. Long-term notes payable Long-term notes payable is obligation in the form of written promissory notes that are not payable within a year or the operating cycle of the company, whichever is longer.

5. Long term-lease obligationLong term-lease obligation is obligation emerges from lease property, plant or equipment that are not payable within a year or the operating cycle of the company, whichever is longer.

6. Deffered income tax liablitiesIt is obligation emerging from different calculation of income tax, caused diferrenciation of accounting treatment between tax law with generally accepted accounting standar. That is not payable within a year or the operating cycle of the company, whichever is longer.

The Nature of Liabilities A. Definitions of Liabilities Liabilities are probable future sacrifices...

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