ACC 131 Seipp Week 12 Lecture Notes: 11/2-11/6
ACC 131 Seipp Week 12 Lecture Notes: 11/2-11/6 ACC 131
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This 4 page Class Notes was uploaded by Daniel Hemenway on Friday November 6, 2015. The Class Notes belongs to ACC 131 at Illinois State University taught by Edward Seipp in Summer 2015. Since its upload, it has received 24 views. For similar materials see Financial Accounting in Accounting at Illinois State University.
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Date Created: 11/06/15
ACC 131 Seipp 112116 Chapter 8 Current and Contingent Liabilities Current liabilities are those obligations that are 1 expected to be retired with existing current assets or creation of new current liabilities and 2 due within one year or one operating cycle whichever is longer All other liabilities are considered longterm Contingent liabilities can be either current or longterm but they are iffy in two ways They may or may not turn into actual obligations and for those contingencies that do become obligations the timing and amount of the required payment is uncertain Recognition and Measurement of Liabilities Liabilities are probable future sacrifices of economic benefits These commitments which arise from activities that have already occurred require the business to transfer assets or provide services to another entity sometime in the future Liabilities have a wide variety of characteristics The future outflow associated with a liability may or may not involve the payment of cash may or may not be known with certainty may or may not be legally enforceable and may or may not be payable to a known recipient When a liability depends on a future event Le a contingent liability such as the outcome of a lawsuit recognition depends on how likely the occurrence of the event is and whether a good estimate of the payment amount can be made Measurement of Liabilities When you owe money you typically pay interest based on the following equa on Total payment Principal Principal x Interest Rate x Period Sometimes companies will appear to give you a 0 interest loan This really means that the interest is included in the sales price because no business is going to truly provide 0 interest Current Liabilities Current liabilities are obligations that require the firm to pay cash or another current asset create a new current liability or provide goods or services within the longer of one year or one operating cycle Since most firms have operating cycles shorter than one year the oneyear rule usually applies ACC 131 Seipp 112116 Some firms combine their current liabilities into a very short list while others provide considerable detail Accounts Payable An account payable arises when a business purchases goods or services on credit It is reallyjust the flip side of an account receivable when you have a payable the business you owe has a receivable Credit terms generally require that the purchaser pay the amount due within 30 to 60 days and seldom require the payment of interest Accounts payable do not require a formal agreement or contract Accrued Liabilities Unlike accounts payable which are recognized when goods or services change hands accrued liabilities are recognized by adjusting entries They usually represent the completed portion of activities that are in process at the end of the period Notes Payable A note payable typically arises when a business borrows money or purchases goods or services from a company that requires a formal agreement or contract like when you sign a contract to lease an apartment or buy a car This formal agreement or contract is what distinguishes the note payable from an account payable Notes payable normally specify the amount to be repaid indirectly by stating the amount borrowed the principal and an interest rate These notes are called interestbearing notes because they explicitly state an interest rate Notes Payable from a Payment Extension In addition to shortterm borrowings notes payable are often created when a borrower is unable to pay an account payable in a timely manner Rolling an account payable into a shortterm note payable would be an example of this Current Portion of LongTerm Debt The current portion of longterm debt is the amount of longterm debt principal that is due within the next year At the end of each accounting period the longterm debt that is due during the next year is reclassified as a current liability ACC 131 Seipp 112116 Since the reclassification of most longterm debt as current does not usually change the accounts or amounts involved journal entries are not required Other Payables Other payables for most retail companies include sales taxes usage taxes or excise taxes for various state local and federal taxing authorities These taxes although collected as part of the total selling price are not additions to revenue Instead they are money collected from the customer for the governmental unit levying the tax These tax collections are liabilities until they are paid to the taxing authority Withholding and Payroll Taxes Businesses are required to withhold taxes from employees earnings and to pay taxes based on wages and salaries paid to employees These withholding and payroll taxes are liabilities until they are paid to the taxing authority Two sources for these taxes are Employees that must pay certain taxes that are withheld from their paycheck This is the difference between gross pay and net pay The business itself which must pay certain taxes based on employee payrolls like matching contributions of Social Security and Medicare and fringe benefits Unearned Revenues Unearned revenue is the liability created when customers pay for goods or services in advance In such instances the amount of the prepayment is a liability for the seller This liability is discharged either by providing the goods or services purchased at which time revenue is recognized or by refunding the amount of the prepayment A similar longterm liability called customer deposits is recorded when customers make advance payments or security deposits that are not expected to be earned or returned soon enough to qualify as current liabilities ACC 131 Seipp 112116 Contingent Liabilities Measurement of the liabilities described so far was not affected by uncertainties about the amount timing or recipient of future asset outflows A contingent liability is not recognized in the accounts unless the event on which it is contingent is probable and a reasonable estimate of the loss can be made Lawsuits filed against a business are classic examples of contingent liabilities Warranties When goods are sold the customer is often provided with a warranty against certain defects A warranty usually guarantees the repair or replacement of defective goods during a period ranging from a few days to several years following the sale The matching concept requires that all expenses required to produce sales revenue for a given period be recorded in that period The recognition of warranty expense and estimated warranty liability is normally recorded by an adjustment at the end of the accounting period As warranty claims are paid to customers or related expenditures are made the liability is reduced Analyzing Current Liabilities Both investors and creditors are interested in a company s liquidity that is its ability to meet its shortterm obligations The following ratios are often used to analyze a company s ability to meet its current obligations Current Ratio Current Assets Current Liabilities Quick Ratio Cash Marketable Securities Accounts Receivable Current Liabilities
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