Chapter 13 - Lecture 1

8/7/2019 Chapter 13 - Lecture 1

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Chapter 13Chapter 13

Part 1Part 1 - - Current LiabilitiesCurrent Liabilities

Classification of LiabilitiesClassification of LiabilitiesEnd of Period AdjustmentsEnd of Period Adjustments


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Classification of LiabilitiesClassification of Liabilities

What is a liability?What is a liability?

A probable future payment of assets or A probable future payment of assets or services that a company is presentlyservices that a company is presentlyobligated to make as a result of pastobligated to make as a result of pasttransactions or events.transactions or events.


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T here are three crucial factors thatT here are three crucial factors that

make up part of the definition of amake up part of the definition of aliability:liability:1.1. T hey are due to past transactions or events.T hey are due to past transactions or events.2.2. T he company has a present obligation.T he company has a present obligation.

3.3. It is for a future payment of assets or It is for a future payment of assets or services.services.


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L iabilities do not include all expectedL iabilities do not include all expected

future payments.future payments.

L iabilities are recorded when theL iabilities are recorded when the

transaction has occurred as per thetransaction has occurred as per therevenue recognition principle.revenue recognition principle.


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ClassificationClassification of of LiabilitiesLiabilitiesE xample:E xample:

XYZ Corporation yearly payroll is $6,000,000, paid onXYZ Corporation yearly payroll is $6,000,000, paid onthe first of the month for the prior months work.the first of the month for the prior months work.

T herefore, we need accrual for the previous month:T herefore, we need accrual for the previous month:

Date Account Title and Explanation Debit Credit

Jan. 31 Salaries Expense 500,000 Salaries Payable 500,000

To accrue January wages(6,000,000 / 12 = 500,000)


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Current L iabilities:Current L iabilities:

E xpected to be paid within one year of E xpected to be paid within one year of the balance sheet date or within thethe balance sheet date or within theoperating cycle of the business,operating cycle of the business,w hichever is longer w hichever is longer , using current, using currentassets.assets.


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D emand loans are loans that have no fixedD emand loans are loans that have no fixeddue date.due date.

Reported as a current liability because theReported as a current liability because thecreditor may demand payment within onecreditor may demand payment within oneyear of the balance sheet or the companysyear of the balance sheet or the companysoperating cycle, whichever is longer.operating cycle, whichever is longer.


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E xamples include:E xamples include:A ccounts payableA ccounts payableWages payableWages payable

Warranty liabilitiesWarranty liabilitiesUnearned revenueUnearned revenueCurrent portion of L ongCurrent portion of L ong--T erm debtT erm debt


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L ongL ong--T erm L iabilities:T erm L iabilities:

D o not require payment within one year D o not require payment within one year or the current operating cycle,or the current operating cycle,whichever is longer.whichever is longer.

E xpected to be paid out of nonE xpected to be paid out of non- -currentcurrentassets.assets.


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L ongL ong--T erm L iabilities:T erm L iabilities:

E xamples include:E xamples include:L ongL ong--T erm Notes PayableT erm Notes PayableMortgage PayableMortgage PayableL

easeL

iabilitiesL

easeL

iabilitiesBonds PayableBonds Payable


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End End- -of of- -Period AdjustmentsPeriod Adjustments

Current Portion of L ongCurrent Portion of L ong--T erm D ebt:T erm D ebt:

PortionL

ongPortionL

ong--T

ermL

iability due withinT

ermL

iability due withinone year of the balance sheet date or one year of the balance sheet date or one operating cycle, whichever isone operating cycle, whichever islonger.longer.

Reported as a Current L iability on theReported as a Current L iability on thebalance sheet.balance sheet.


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End End- -of of- -Period AdjustmentsPeriod Adjustments

Current Portion of L ongCurrent Portion of L ong--T erm D ebt:T erm D ebt:

No journal entry required; merely reclassifiedNo journal entry required; merely reclassifiedfor balance sheet presentation.for balance sheet presentation.

T he division of the current portion and theT he division of the current portion and thelonglong--term portion involves the principalterm portion involves the principalamount only (any interest would be accruedamount only (any interest would be accruedin the current period as interest payable).in the current period as interest payable).


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nown ( D eterminable) L iabilities:Known ( D eterminable) L iabilities:

Liabilities are determinable when:

Liabilities are determinable when:It is known whom to pay,It is known whom to pay,When to pay and,When to pay and,How much to pay.How much to pay.

T hey are set by agreements, contracts,T hey are set by agreements, contracts,or laws and are measurable.or laws and are measurable.


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Known ( D eterminable) L iabilities:Known ( D eterminable) L iabilities:

E xamples include:E xamples include:A ccounts PayableA ccounts PayablePayrollPayroll

SalesT

axesSalesT

axesUnearned RevenueUnearned RevenueNotes PayableNotes Payable


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T rade A ccounts Payable:T rade A ccounts Payable:

A mounts owed to suppliers for good or A mounts owed to suppliers for good or services purchased on credit.services purchased on credit.

T ypically due within the current period,T ypically due within the current period,they are current liability.they are current liability.


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Payroll L iabilities:Payroll L iabilities:

T here are many different payroll relatedT here are many different payroll relatedliabilities.liabilities.

A ll are current liabilities.A ll are current liabilities.


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Payroll L iabilities:Payroll L iabilities:

E xamples include:E xamples include:E I PayableE I PayableE mployee Income T axes PayableE mployee Income T axes Payable

UnionD

ues PayableUnionD

ues PayableWages PayableWages Payable


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Provincial Sales T ax:Provincial Sales T ax:

A consumption tax levied on the salesA consumption tax levied on the salesto the FIN AL users of products.to the FIN AL users of products.

Consumers pay the tax on their Consumers pay the tax on their purchases.purchases.


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Provincial Sales T ax:Provincial Sales T ax:

T he company collecting it must remit itT he company collecting it must remit itto the government.to the government.

Remittances occur regularly; thereforeRemittances occur regularly; thereforethis is a current liability.this is a current liability.


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G oods and Services T ax:G oods and Services T ax:

Avalue added tax on just about all

Avalue added tax on just about allgoods and services sold in Canada.goods and services sold in Canada.

D iffers slightly from PS T D iffers slightly from PS T -- all partiesall partiesinvolved in the transaction of taxableinvolved in the transaction of taxablegoods and services must charge thegoods and services must charge theG S T on each transaction.G S T on each transaction.


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A registrant must pay G S T for taxable goodsA registrant must pay G S T for taxable goodspurchased (Input T ax Credits) and mustpurchased (Input T ax Credits) and mustcollect it on taxable goods sold.collect it on taxable goods sold.

Input T ax Credits are deducted from the G S T Input T ax Credits are deducted from the G S T amounts collected, and the net amount isamounts collected, and the net amount isremitted to (or collected from) theremitted to (or collected from) thegovernment.government.


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G S T Receivable account is used toG S T Receivable account is used toaccount for the Input T ax Credit. T hisaccount for the Input T ax Credit. T hisis a current asset.is a current asset.

G S T Payable is used to account for theG S T Payable is used to account for thecurrent liability due to the government.current liability due to the government.


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A t the end of the reporting period, theA t the end of the reporting period, thepresentation on the balance sheetpresentation on the balance sheetdepends on whether the net balance isdepends on whether the net balance isa credit or a debit. Only one isa credit or a debit. Only one ispresented on the balance sheet, notpresented on the balance sheet, notboth.both.


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Note:Note: Stores that offer No P.S.T

. andStores that offer No P.S.T

. andNo G .S. T . are still obligated to remitNo G .S. T . are still obligated to remitthese taxes to the respectivethese taxes to the respectivegovernments. T he underlying productgovernments. T he underlying product

is not suddenly tax exempt; you areis not suddenly tax exempt; you aremerely getting a discount equivalent tomerely getting a discount equivalent tothe taxes paid.the taxes paid.


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Unearned Revenues:Unearned Revenues:

A mounts received in advance fromA mounts received in advance fromcustomers for future products or services.customers for future products or services.

E ventually become earned due to theE ventually become earned due to thepassage of time or the deliverance of futurepassage of time or the deliverance of futureproducts or services.products or services.


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Classification of LiabilitiesClassification of LiabilitiesEnd End- -of of- -Period AdjustmentsPeriod Adjustments

Q uestions?Q uestions?


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Assignment Hints Assignment HintsQ S 13Q S 13--6:6:Credit G S T Payable $514.50Credit G S T Payable $514.50

E xercise 13E xercise 13- -3:3:Part 2: Y ou are given a payment schedule, not aPart 2: Y ou are given a payment schedule, not abalance sheet.balance sheet.

E xercise 13E xercise 13- -6:6:

a)a) Use 1.5 monthsUse 1.5 monthsE xercise 13E xercise 13- -7:7:c) PS T Payable $19,260c) PS T Payable $19,260

Chapter 13 - Lecture 1

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Transcript of Chapter 13 - Lecture 1