Chapter 10: Reporting and Analyzing Liabilities
Lecture Videos
Learning Objective 10.1: Explain How to Account for Current Liabilities
- Accounting for Current Liabilities: What is a Current Liability?
o = a debt that a company expects to pay from existing current assets or
through the creation of other current liabilities and within one year or the
operating cycle, whichever is longer
o = is a creditor’s claim on total assets that a company expects to pay
▪ From existing current assets or through the creation of other current
liabilities, and
▪ Within on year or the operating cycle, whichever is longer
o Examples
▪ Notes payable
▪ Accounts payable
▪ Unearned revenues
▪ Accrued liabilities such as taxes, salaries and wages, and interest
- Importance of Current Liabilities
o Financial statement users want to know:
▪ Whether a company’s obligations are current or long-term
• --> more current liabilities than current assets indicates a lack
of liquidity or short-term dept-paying ability
▪ The types of liabilities a company has
• If a company declares bankruptcy, a specific, predetermined,
order of payment to creditors exists
o Thus, the amount and type of liabilities are of critical
importance
- Notes Payable
o = obligations in the form of written notes
o = usually require the borrower to pay interest
o = frequently issued to meet short-term financing needs
o = classified as current liability
▪ --> If due for payment within one year of balance sheet
- Recording Notes Payable
o When a company issues an interest-bearing note, the amount of assets it
receives generally equals the note’s face value
, o **Interest is not recorded when the note is issued, it is recorded over the
passage of time
- Calculating Accrued Interest on Notes
o Because interest accrues over the life of the note, the company must
periodically record the accrued interest
o Interest = Face Value of Note * Annual Interest Rate * Time in Terms of Years
- Accruing Interest on Notes Payable
o Recorded periodically at financial statement dates
o Recorded as an adjusting entry
▪ = increase(debit) of Interest Expense
▪ = increase(credit) of Interest Payable
- Reporting Interest on Notes Payable
o Interest expense can be reported in Other Expenses and Losses on the
income statement
- Record the Maturity of Notes Payable
o Upon maturity..
▪ Notes payable is decreased (debit)
▪ Previously accrued interest, if any, is decreased (debit)
▪ Cash is decreased in the amount of the face value + any interest
accrued (credit)
- Sales Taxes Payable
o Sales taxes are expressed as a stated percentage of the sales price
o Subject to sales taxes by states
▪ Many products at retail stores
▪ Most online purchases
o Retailer
▪ = is there selling company that serves as a collection agent for the
taxing authority
• --> via collected tax from customer
o And remitting the collections to state’s department of
revenue
▪ *when the company remits the taxes to the
taxing agency, it decreases sales taxes payable
and cash
▪ ****Sales Taxes are NOT reported as an expense
- Recording Sales Taxes Payable
o Under most state sales tax laws, the selling company..
Lecture Videos
Learning Objective 10.1: Explain How to Account for Current Liabilities
- Accounting for Current Liabilities: What is a Current Liability?
o = a debt that a company expects to pay from existing current assets or
through the creation of other current liabilities and within one year or the
operating cycle, whichever is longer
o = is a creditor’s claim on total assets that a company expects to pay
▪ From existing current assets or through the creation of other current
liabilities, and
▪ Within on year or the operating cycle, whichever is longer
o Examples
▪ Notes payable
▪ Accounts payable
▪ Unearned revenues
▪ Accrued liabilities such as taxes, salaries and wages, and interest
- Importance of Current Liabilities
o Financial statement users want to know:
▪ Whether a company’s obligations are current or long-term
• --> more current liabilities than current assets indicates a lack
of liquidity or short-term dept-paying ability
▪ The types of liabilities a company has
• If a company declares bankruptcy, a specific, predetermined,
order of payment to creditors exists
o Thus, the amount and type of liabilities are of critical
importance
- Notes Payable
o = obligations in the form of written notes
o = usually require the borrower to pay interest
o = frequently issued to meet short-term financing needs
o = classified as current liability
▪ --> If due for payment within one year of balance sheet
- Recording Notes Payable
o When a company issues an interest-bearing note, the amount of assets it
receives generally equals the note’s face value
, o **Interest is not recorded when the note is issued, it is recorded over the
passage of time
- Calculating Accrued Interest on Notes
o Because interest accrues over the life of the note, the company must
periodically record the accrued interest
o Interest = Face Value of Note * Annual Interest Rate * Time in Terms of Years
- Accruing Interest on Notes Payable
o Recorded periodically at financial statement dates
o Recorded as an adjusting entry
▪ = increase(debit) of Interest Expense
▪ = increase(credit) of Interest Payable
- Reporting Interest on Notes Payable
o Interest expense can be reported in Other Expenses and Losses on the
income statement
- Record the Maturity of Notes Payable
o Upon maturity..
▪ Notes payable is decreased (debit)
▪ Previously accrued interest, if any, is decreased (debit)
▪ Cash is decreased in the amount of the face value + any interest
accrued (credit)
- Sales Taxes Payable
o Sales taxes are expressed as a stated percentage of the sales price
o Subject to sales taxes by states
▪ Many products at retail stores
▪ Most online purchases
o Retailer
▪ = is there selling company that serves as a collection agent for the
taxing authority
• --> via collected tax from customer
o And remitting the collections to state’s department of
revenue
▪ *when the company remits the taxes to the
taxing agency, it decreases sales taxes payable
and cash
▪ ****Sales Taxes are NOT reported as an expense
- Recording Sales Taxes Payable
o Under most state sales tax laws, the selling company..
