Unit 9Liabilities&Owner'sequityassets = liabilitie s + owner'seguity
Unit 9 Liabilities & Owner’s equity assets = liabilitie s + owner'sequity
I.Liabilities A liabilityis apresent obligationreguiring thefuture payment of anasset,the future performance ofservice,or thecreation of anotherliability. Inaccordancewith paymentperiodliabilitiescanbeclassifiedintocurrentliabilitiesand non-currentliabilities
2 Ⅰ. Liabilities A liability is a present obligation requiring the future payment of an asset, the future performance of service, or the creation of another liability. In accordance with payment period, liabilities can be classified into current liabilities and non-current liabilities
1.CurrentliabilitiesDefinition口Current liabilitiesaredebtsthat aredue and mustbepaid withinoneyearor theoperatingcyclelongerthanayear.Such obligations will typically involve the use ofcurrent assets,or providing of some service国PurposeItsexistenceisto meetthe demand ofthebusinessnormalturnover.口ContentAccountsPayable,NotesPayable,InterestPayable,TaxPayable,etc3
3 1.Current liabilities Definition Current liabilities are debts that are due and must be paid within one year or the operating cycle longer than a year. Such obligations will typically involve the use of current assets, or providing of some service. Purpose Its existence is to meet the demand of the business’ normal turnover. Content Accounts Payable, Notes Payable, Interest Payable, Tax Payable, etc
(1)AccountPayableDefinitionAccountspayable are short-termobligation owed to the suppliers forpurchasingmaterials,merchandiseorservices.The timeto record accountspayableisusuallyin accordancewithinvoicesorbillsreceived/
4 (1)Account Payable Definition Accounts payable are short-term obligation owed to the suppliers for purchasing materials, merchandise or services. The time to record accounts payable is usually in accordance with invoices or bills received
AccountingTreatment门It shouldberecordedat the amountpayable.If cashdiscountis availableit shouldbereflectedintherecording entries口ExampleAbusinesspurchasesabatchofmaterialsof $50,000withatermof2/10.n/30.5
5 Accounting Treatment It should be recorded at the amount payable. If cash discount is available, it should be reflected in the recording entries. Example A business purchases a batch of materials of $50,000 with a term of 2/10, n/30
When the liability occurred口50,000Dr.MaterialCr.AccountsPayable50,000If thepayment was madewithin10 daysDr.Accounts Payable50,00049,000Cr.CashPurchase Discount1,000Ifthepaymentwasmadeafter10days日Dr.AccountsPayable50.00050,000Cr.Cash6
6 Dr. Material 50,000 Cr. Accounts Payable 50,000 When the liability occurred If the payment was made within 10 days If the payment was made after 10 days Dr. Accounts Payable 50,000 Cr. Cash 49,000 Purchase Discount 1,000 Dr. Accounts Payable 50,000 Cr. Cash 50,000
(2)NotesPayableDefinitionNotesPavableareformal short-termborrowingsusuallyevidencedbya specificwrittenpromiseto payandmostlyissuedto meet short-term financing needs.Notespayableare oftenusedinstead ofaccountspayablebecausethey give thelenderwrittendocumentationoftheobligation
7 (2)Notes Payable Definition ➢ Notes Payable are formal short-term borrowings usually evidenced by a specific written promise to pay and mostly issued to meet short-term financing needs. ➢ Notes payable are often used instead of accounts payable because they give the lender written documentation of the obligation
AccountingTreatmentNotespayabletypicallyinvolveinterests.Whenthe note is repaid,the differencebetween thecarrying amount of the note and the cashnecessary torepaythat noteisreportedasinterestexpense.WhentheliabilityoccursDr.AssetsCr.Notes PayableWhenthenoteispaid口Dr.NotesPayableInterestexpenseCr Cash8
8 Accounting Treatment Notes payable typically involve interests. When the note is repaid, the difference between the carrying amount of the note and the cash necessary to repay that note is reported as interest expense. When the liability occurs When the note is paid Dr. Assets Cr. Notes Payable Dr. Notes Payable Interest expense Cr. Cash
AccountingTreatmentwhenthereisaccrued interestDr.InterestExpenseCr.InterestPayable口Dr.NotesPayableInterest PayableCr. Cash9
9 when there is accrued interest Dr. Interest Expense Cr. Interest Payable Dr. Notes Payable Interest Payable Cr. Cash Accounting Treatment
ExampleKroger purchased a batch of merchandise of$20,000 on May 1, and signed a 3-month, 6% noteWhentheliability occurred20.000口Dr.Merchandise20.000Cr.NotesPayable10
10 Example Kroger purchased a batch of merchandise of $20,000 on May 1, and signed a 3-month, 6% note. When the liability occurred Dr. Merchandise 20,000 Cr. Notes Payable 20,000