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LIABILITIES

Chapter 10

Liabilities:

A claim against the assets of organization.

Liabilities arising out of past transactions or


actions.
& are needed to be settled in some future date.

Recorded on the balance sheet (right side).


Liabilities include loans, accounts payable,
mortgages, deferred revenues and accrued
expense etc.

Types of Liabilities:
Current Liability:

1.
.

Liabilities due within 1 year or the companys


operating cycle if longer

Possible Current liabilities accounts.

Accounts Payable
Short-term Notes Payable
Accrued Liabilities
Payroll Liabilities
Unearned Revenues
Sales Tax Payable etc.

1. Accounts Payable

Amounts owed for purchases of goods or


services on account

The purchase can be for an Asset

Inventory (generally largest)

No interest associated with money owed, and it


is assumed the A/P will be paid quickly

2. Note Payable

Written promises to pay stated sum of


money at future date.

Classified as current (if due within 12


months )

Non-current (if due after 12 months) of the


balance sheet date.

2. Notes Payable.Contt
On 1 Oct, 2005 the company issued a one year
$8,000 note payable at 10% interest from a local
bank.
1 Oct: Cash
8,000
Note Payable
8,000

Interest must be accrued at fiscal year end (Dec 31) for


interest owed but not yet due.
Dec 31

Interest Expense
Interest Payable

200
200

2. Notes Payable.Contt
To record repayment at maturity Sep 30, 2006
Sep 30. Note Payable, short-term

8,000

Interest Payable

200

Interest Expense
Cash

600
8,800

3. Accrued Liabilities:

An accounting term for an expense that


a business has incurred but has not yet
paid.
A company can accrue liability for any
number of items, such as,
Accrued liabilities can be recorded as either
short or long-term liabilities on a company's
balance sheet.

4. Payroll Liabilities:

Amounts owed to employees for work


performed.
They are recorded separately from accounts
payable.
Expense accounts such as salaries or wages
expense are used to record an employee's gross
earnings.
& if not paid than liability account such as
salaries payable, wages payable, or accrued
wages payable is used to record the net pay
obligation to employees.

5. Unearned Revenue

When an individual or company receives money


for a service or product that has yet to be fulfilled
is called unearned revenue.
Unearned revenue can be believed of as a "prepayment" for goods or services which a person or
company is expected to produce to the
purchaser.
As a result of this prepayment, the seller now
has a liability equal to the revenue earned until
deliver of the good or service.

Long Term Liabilities:

Long-term liabilities are obligations that


are expected to be paid after one year.

Long-term liabilities include,

Bonds.
Long-term note payables
Lease obligations etc.

1. Bond:

Bonds are a form of interest-bearing


debt instruments issued by corporations,
governments, and governmental
agencies.

Bonds, like common shares, can be sold


in small denominations (usually a
thousand dollars), and as a result they
attract investors.

Bond

Share

Types of Bond:
1.
2.
3.
4.

Government Bond.
Municipal Bond.
Agency Bond.
Corporate Bond.
1.
2.
3.

Mortgage Bond.
Debenture.
Junk Bond.

Lease Liabilities:

A lease is a contract in which the lessor


gives the lessee the right to use an asset
for a specified period of time in
exchange for periodic rental payments.
The lessor is the owner of the asset.
The lessee is a renter.

Types of Leases:
Operating Lease:

1.

In an operating lease there is temporary


use of the property by the lessee with no
change of ownership of property at the end
of contract.

2. Capital Lease:
A type of lease in which the ownership
changes at the end of contract.

Lets Learn Amortization table and perform


some numerical.

THANKS