1、Lesson Five:Liabilities Aims:1.To explain what liability is.2.To discuss accounts payable and notes payable.3.To introduce what a long-term note payable is and how a company accounts for this type of debt.4.To discuss what risks are associated with long-term debt.5.To introduce bonds payable,and to
2、study how a company records and reports the transactions associated with bonds.5.1Definition of Liabilities Liabilities may be defined as the probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entitie
3、s in the future as a result of past transactions or events.Liabilities can be divided into two parts:current liabilities and long-term liabilities.5.2Current Liabilities Current liabilities are obligations that must be paid within one year or within the ope-rating cycle,whichever is longer.5.3Long-t
4、erm Liabilities Amounts owed to someone else which are payable after one year.Examples include:(1)Long term loans;(2)Debentures,which are long term loans secured on the business assets.This means if the business fails to repay back the loan on time the business assets are at risk.5.4The Kinds of Cur
5、rent Liabilities Among the most common examples of current liabilities are accounts payable,short-term notes payable,the current portion of long-term debt,accrued liabilities,and unearned revenue.5.5Accounts Payable Accounts payable often are subdivided into the categories of trade accounts payable
6、and other accounts payable.Trade accounts payable are short-term obligations to suppliers for purchases or merchandise.Other accounts payable include liabilities for any goods and services other than merchandise.5.6Notes Payable Notes payable are issued whenever bank loans are obtained.Other events
7、which may give rise to notes payable include the purchase of real estate or costly equipment,the purchase of merchandise,and the substitution of a note for a past-due account payable.5.9Discount on Notes Payable The amount of discount is recorded in a separate contra liability account called Discoun
8、t on Notes Payable.The balance of this account is subtracted from the Notes Payable account to arrive at the book value of Notes Payable.5.12The Current Portion of Long-term Debt Some long-term debts,such as mortgage loans,are payable in a series of monthly or quarterly installments.In these cases,t
9、he principal amount due within one year(or the operating cycle)is regarded as a current liability,and the remainder of the obligation is classified as a long-term liability.5.13Accrued Liabilities Accrued liabilities arise from the recognition of expenses for which payment will be made in a future p
10、eriod Examples of accrued liabilities include interest payable,income taxes payable,and amounts related to payrolls.5.14Interest Payable Interestthe cost of borrowingaccrues with the passage of time.When companies enter into long-term financing agreements,they may become committed to paying large am
11、ounts of interest for many years to come.At any balance sheet date,however,only a small portion of this total interest obligation represents a“liability”.5.15Income Taxes Payable The income taxes expense accrues as profits are earned.At the end of each accounting period,the amount of accrued income
12、taxes is estimated and recorded in an adjusting entry.Income tax expense 20,000 Income tax payable 20,000 5.16Payroll Liabilities Every business incurs a number of accrued liabilities relating to its payroll.The largest of these liabilities is the obligation to pay employees for services rendered du
13、ring the Period.5.17Unearned Revenue A liability for unearned revenue arises when a customer pays in advance.Upon receipt of an advance payment from a customer,the company debits Cash and credits a liability account such as Unearned Revenue.5.18Estimated Liabilities The term estimated liabilities re
14、fer to liabilities,which appear on financial statements at estimated dollar amounts.5.19Contingent Liability Contingent liability is a potential liability,which either will develop into a full-fledged liability or will be eliminated entirely by a future event.For example,when a business endorses a n
15、ote and turns it over to a bank for cash,the business(as endorser)is contingently liable to the bank.5.20The Category of Long-term Liabilities Long-term liabilities are the obligation an enterprise that is not due within the next 12 months or the operating cycle(if longer than a year).such as Bonds
16、Payable,Mortgages Payable,Long-term Notes Payable and Leases.5.21Bonds Payable The issuance of bonds payable is a technique of splitting a large loan into a great many units,called bonds.As an interest-bearing(or discounted)certificate of debt issued by a government or corporation in order to raise
17、money,each bond is a long-term interest-bearing note payable,usually in the face amount of$1 000.5.23Bonds Issued at a Discount Assume that a corporation plans to issue$2 000 000 face value of 9%,10-year bonds.At the issuance date of January 1,the going market rate of interest is slightly above 9%an
18、d the bonds sell at a price of only 98($980 for each$1 000 bond).The issuance of the bonds will be recorded by the following entry:Cash 1 960 000 Discount on Bonds Payable 40 000 Bonds Payable 2 000 0005.24Amortization of Bond Discount The simplest method of amortizing bond discount is the straight-line method,which allocates an equal portion of the discount to Bond Interest Expense in each period.Bond Interest Expense92 000 Cash 90 000 Discount on Bonds Payable 2 000
