Accounting chapters 9-12

Difference between current vs. long term liability

Current liabilities are obligations due within one year, while long-term liabilities are due beyond one year.

how can companies get money (2 ways)

1. Debt=borrowing money from creditors like banks

2. Equity=money from shareholders/owners

is accounts payable a current or longterm liability?

current liability

Difference between notes payable and accounts payable

Accounts payable=what you owe if you haven’t payed for what you bought yet (current liability)

Notes payable=Borrowed money and signed a promise to repay. (current or long-term liability)

Payroll taxes + 3 kinds

taxes on employees wages.

1. FICA=social security and Medicare for retirement

2. Federal income tax

3. State income tax

is payroll tax a current or long-term liability?

current

Unearned revenue + major example + current or long term liability

cash received before service is provided (example=gift card)

current liability

Journal entry for a unearned revenue account (before service and after service)

Before service: debit cash, credit unearned revenue

After service: debit unearned revenue, credit sales revenue

Accounts Payable turnover ratio= Cost of Goods sold ÷ Average Accounts payable

what does this tell us?

Tells us how quickly a company pays suppliers. A high ratio means suppliers are being payed at a timely manor/faster rate (fast=10+, slow=4)

what equation does notes payable use?

the interest formula! Interest = Principal × Annual Interest Rate × (Number of Months / 12 Months)

Interest is an…

Expense

Contingent liabilities + when do you record it on balance sheet?

Money for lawsuits and liabilities

Record on balance sheet if the probability of owning money is high and you can estimate how much money will be owed

Working Capital = Current Assets – Current Liabilities, what does this tell us?

Do we have enough money to pay our current liabilities?

Two types of debt involved with long-term liabilities

• Secured debt: Bank can take away asset if you don’t make payments (example=car payments or house)

• Unsecured debt: No asset is taken away (example=credit cards)

4 places where money can be borrowed

1. banks

2. Insurance companies

3. pension plans (retirement investment)

4. bonds

Bond and how is it different from a share?

Set amount of interest that must be payed that must be payed back to investors.

You own a part of the company with share, but you don’t own a comapany with a bond.

Time value of money

Money today is not worth the same amount in the future (thanks to interest)

annuity and it’s 3 requirements

A series of consecutive payments

1. same payment amount each period

2. interest periods are equal in length

3. the same interest rate each period

what must you ask yourself when solving for wither present value, future value, or payment?

Does this meet the 3 annuity requirements or is this a single sum payment?

Why is it important to solve for PV for long-term loans?

Solving for PV tells us what we put on the balance sheet today.

Journal entry for recording a PV on a long-term loan

Debit asset, credit note payable