The Nature of Liabilities
A. Definitions of Liabilities
Liabilities 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 obligation
3) The transaction or event creating the
obligation has already occurred
C. The Types of Liabilities
1) 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 Debt
Long 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 payment
2. 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
1. Account payable/trade account payable
Liablities emerge from merchandise purchasing for resale
or
The 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 Destination
Transactons above record as follows;
(in Rp)
Date
Description
2008
July
10 Merchandise
Inventory
Account Payable
Reff.
Debit
Credit
10,000,000
10,000,000
2. Unearned rent
Liabilities emerge from the receipt of rent in
advance
3. Taxes payable
The amount of taxes owed to governmental
units
4. Interest payable
The amount of interest owed on borrowed
funds
5. Wages payable
The amount owed to employees
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:
Date
2008
July
10
Description
Merchandise Inventory
Account Payable
Reff.
Debit
Credit
10,000,000
10,000,000
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)
Date
2008
August 10
Description
Cash
Uneaned tickets revenue
Reff.
Debit
Credit
50,000,000
50,000,000
• The entry to record services which completed to
customers
(in Rp)
Date
2008
Oct
25
Description
Reff.
Unearned ickets revenue
Ticktes revenue
Debit
Credit
50,000,000
50,000,000
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%.
• The entry for record the sales of merchandise is:
(in Rp)
Date
2008
August 10
Description
Cash
Reff.
Debit
Credit
30,800,000
Sales taxes payable
Sales
2,800,000
28,000,000
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)
Date
2008
Oct 1
Description
Cash
Reff.
Debit
Credit
100,000,000
Notes Payable
100,000,000
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)
Date
2008
Des
31
Description
Interest expense
Interest Payable
Reff.
Debit
Credit
3,000,000
3,000,000
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)
Date
2008
Jan
25
Description
Retained Earning
Dividen Payable
Reff.
Debit
Credit
450,000,000
450,000,000
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)
Date
2008
Dec 31
Description
Income Taxes Expense
Income Taxes Payable
Reff.
Debit
Credit
665.000.000
665.000.000
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)
Date
2008
Dec 31
Description
Wages and Salary Expense
Wages and Salaries Payable
Payable
Reff.
Debit
Credit
xxx
xxx
• 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
Account
Receivable
Cash
Customer
A
Customer
B
Account
Payable
Customer
C
Creditor
X
Creditor
X
Owner’s
Capital
Creditor
X
Relationship Beetwen Ledger
Accounts Payable Subsidiary Ledger
GENERAL LEDGER
ANDA
Date
Ref
2008
Jan 10
19
Debit
Credit
Balance
ACCOUNTs PAYABLE
Date
6.000
4.000
6.000
2.000
Ref
2008
Jan 31
31
Debit
Credit
Balance
12.000
8.000
BANASA
Date
Ref
Debit
Credit
Balance
2008
Jan 12
3.000
21
3.000
3.000
0
GIOVANI
Date
Ref
Debit
2008
Jan 20
29
Credit
3.000
1.000
Balance
3.000
2.000
The subsidiary
ledger is separate
from the general
ledger
Accounts payable is
a control account
12.000
4.000
Journalizing and Posting the General Ledger
Karns Wholesale Supply
General Journal
Account Titles and Explanation
Date
1996
May 31 Account Payable-Fabor and son
Purchase returns and Allowances
(Receivable credit for returned goods)
GI
Credit
Debit
Ref
25/√
73
500
500
ACCOUNT PAYABLE SUBSIDIARY LEDGER
ACCOUNT PAYABLE SUBSIDIARY LEDGER
Fabor and Son
Ref Debit
Credit
Fabor and Son
Date
1996
May 14
23
26
31
PI
CPI
PI
GI
6,900
6,900
500
Balance
6,900
…………
8,700
8,700
8,200
Date
2008
May 31
31
31
Ref
PI
CPI
GI
Debit
Credit
63,900
42,600
500
No. 25
Balance
63,900
21,300
20,800
Purchase Returns and Allowances
Date
2008
May 31
Ref
GI
Debit
Credit
500
No. 73
Balance
500
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
100
Estimated rate of defective units
5%
Total estimated defectve units
5
Average warranty reapir cost
Rp. 150.000
Estimated prodct warranty liability
Rp. 750.000
• The adjusment entry for recording accrues
warranty cost is:
Date
2008
Dec
31
Description
Reff.
Warranty Expense
Wages and Salaries Payable
Estimated
Wararntywarranty
Liability costs)
(to
accrue estimated
Debit
Credit
750,000
750,000
• The entry for recording repair cost occurs
during the year ( 3 units are repair) is:
(in Rp)
Date
2008
Dec 31
Description
Estimated warranty Liability
Repairs Parts/Wages Payable
(to record honoring of 3 waranty contract on 2008
sales)
Reff.
Debit
Credit
450,000
750,000
PRESENTATION OF CURRENT
LIABILITIES
STAR ROCK, CO
BALANCE SHEET
PER DEC, 31, 2008
Current Liabilities (in million rups)
Notes Payable
Account Payable
Sallaries Payable
Taxes Payable
Interest Payable
Long-term Debt due to within one year
Total Current Liablities
145
231
422
356
265
1.567
2.986
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 payable
It is a loan or note that has specific assets of the company (land and
buildings, for example) pledged as security for repayment
3. Pension liability
It 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 obligation
Long 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 liablities
It 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.