Chapter 10 grade 12 accounting current liabilties

Current liabilities

Debts that can reasonably be expected to be paid within one year :

• From existing current assets or by creating other current liabilities.

Definitely determinable liabilties

They must have a 1) known amount, 2) payee, and 3) due date

Notes payable

Usually an extension of unpaid accounts payable or for larger purchases

• Often require the borrower to pay interest

• The obligations come in the form of written promissory notes

• Gives lender proof of obligation in case legal action is needed to collect

Issue for varying periods - notes payable

If due within one year of the balance sheet date, classified as a current liability

Sale taxes

Expressed as a percentage of the sales price of goods sold to customers

• Includes goods and service tax (GST), provincial sales tax (PST) and harmonized sales taxes (HST) which is GST and PST combined.

• Remitted to government monthly, quarterly or annually(depending on sales volume)

• Amounts paid by customers for sales tax are not considered revenue, but are credited to Sales Tax(HST) Payable

• Amounts we spend on HST are debited to the HST Payable account to reduce our liability to the government or possibly receive a refund

GST

goods and service tax

PST

provincial sales tax

HST

GST and PST combined

Sales taxes: if customers do not pay amoutn owing

we need to reduce the sales tax payable when we write off their account.

Dr. HST payable 13

DR Allowance for doubtful accounts 100

CR accounts receivable 113

Unearned revenue

• Record funds received in advance for a service, subscription or season tickets as a current liability if the customer is to be satisfied in the next year.

• Bring into revenue each month as service/goods provided

Current maturitites of long term debt

• The portion of long-term debt that is due within the current year

• Amount not due within current year is disclosed as a long-term liability

• No adjusting entry is required to recognize the current portion of long-term debt

• The proper classification is made when the balance sheet is prepared

Estimated liabilties

• Obligation exists but the amount and timing is uncertain

a) We owe someone, but not sure how much, when or even who

b) But the amount of the liability can be reasonably estimated

• Ensures revenues and expenses are matched in the current period

• Examples include : product warranties and promotions

Product warranties

• Promises by seller to buyer to repair or replace a product if it is defective or does not perform

• Warranties will lead to future costs for replacement or repair of defective units

• Cost of warranty is estimated and accrued based on prior experience

• Debit warranty expense and credit warranty liability

• This matches the cost of the warranty to the same period that the related sale occurred

promotions

• Incentives, such as coupons and rebates, to attract or retain customers

• When a promotional item results in a lower\ selling price, cost of promotion should be accounted for as adecrease in revenue

• Record the decrease in revenue in the same period the revenue is recognized: matching principle

• Estimate the cost based on experience

• Debit Contra Revenue(e.g. Sales Discounts for Coupon Liability) and Credit Liability(e.g.

Coupon Liability)

• Debit Liability when the incentive is claimed and credit asset(usually cash) surrendered

Contingencies

An existing condition that is uncertain

• It is not known whether a gain or loss will occur

• Dependent upon occurrence of one or more future events (which may or may not happen)

• A contingent asset if possibility of a gain

• A contingent liability if possibility of a loss

Contingencies are recorded if

Contingency is likely & the amount can be reasonably estimated.

The Entry to record is :

Dr. expense account

Cr. liability account

Continges conditions are not met but event is possible

Contingency is disclosed in a note to the financial statements, but not recorded

Finanical statement presentation liabilties

• Current liabilities are the first category reported in the liabilities section of the balance sheet

• Each type of current liability is listed separately

• Listed in order of liquidity, usually by

maturity date

• Also common to show bank loans, notes payable and accounts payable first regardless of size

disclosed in notes

Terms of operating lines of credit, notes

payable and other information