ADM1340 Ch10-Liabilities
Page 1: Introduction to Financial Accounting
École de gestion TELFER
School of Management
Linked with Leadership
Focus on Financial Accounting
Chapter 10: Liability
Instructor: Shujun Ding, Ph.D.
Page 2: Study Objectives
Objectives of Chapter 10
Account for current liabilities: Understanding how to record and manage current liabilities in financial statements.
Identify requirements: Understanding the requirements for financial statement presentation and analysis of liabilities, which is crucial for accurate financial reporting.
Page 3: Overview of Liabilities
Definition and Classification
Liabilities: Obligations resulting from past transactions that must be settled in the future either through asset transfers or providing services.
Classification: Liabilities are classified as current and non-current depending on their due dates.
Page 4: Current Liabilities
Characteristics
Expected payment: Current liabilities are expected to be paid within one year.
Sources: Payment is expected to be made from existing current assets or by creating new current liabilities.
Non-current liabilities: If debts do not meet both criteria, they are classified as non-current (long-term).
Page 5: Types of Current Liabilities
Common Current Liabilities
Bank indebtedness from operating lines of credit.
Accounts payable and accrued liabilities: Obligations for items purchased on credit.
Unearned revenue: Revenue received before service delivery.
Notes or loans payable: Short-term loans that need to be repaid.
Sales taxes and property taxes: Obligations to pay taxes.
Payroll liabilities: Wages owed to employees.
Current portion of non-current debt: The part of long-term debt that is due within the current year.
Page 6: Operating Line of Credit
Definition and Terms
Prearranged agreement: A contract allowing a company to borrow up to a specified amount as needed.
Purpose: To help manage temporary cash shortfalls.
Interest Rate: Typically charged at a floating (variable) interest rate.
Collateral: Security may be required by the bank when borrowing occurs.
Result: Usage leads to bank indebtedness recorded as a liability.
Page 7: Sales Taxes
Types of Sales Taxes
Federal Goods and Services Tax (GST): A national sales tax in Canada.
Provincial Sales Tax (PST or QST): Tax imposed by provincial governments.
Harmonized Sales Tax (HST): A combination of GST and PST in certain provinces.
Page 8: Sales Tax Payable
Recording Sales Tax
Sales tax can be included or excluded from the sale price.
Remittance: Sales tax collected must be periodically remitted to the government.
Journal Entry: On payment, debit Sales Tax Payable account and credit Cash.
Page 9: Example of Sales Tax Calculation
Practical Illustration
Scenario: BSE Ltd. sells $5,000 of inventory, cost is $3,700.
HST: Collected at 13%, remitted quarterly.
Journal Entry Requirement: Capture sale and HST implications.
Page 10: Calculating Sales Revenue
Sales Portion Calculation
Formula: Total Receipts divided by (1 + Tax Rate).
Example: If total receipts are $11,300 and tax rate is 13%, then:
Calculation: $11,300 ÷ 1.13 = $10,000 sales revenue.
Page 11: Payroll Liabilities
Employee and Payroll Responsibilities
Three types of payroll liabilities:
Gross Pay: Total salary and wages owed.
Required Deductions: Amounts withheld from gross pay.
Net Pay: Gross pay minus deductions.
Page 12: Employee Payroll Deductions
Mandatory and Voluntary Deductions
Mandatory Deductions: Include CPP, EI, and income taxes.
Voluntary Deductions: May consist of health benefits, union dues, and charitable contributions.
Page 13: Employer Payroll Obligations
Employer Responsibilities
Employer contributions to:
CPP and EI.
Workers' compensation coverage.
Employee benefits such as vacation pay and health plans.
Page 14: Payroll Structure
Deductions Overview
Components of payroll deductions:
CPP, EI, Federal Tax, Provincial Tax.
Voluntary deductions such as health insurance premiums.
Page 15: Breakdown of Deductions
List of Deductions
Detailed deductions can include:
CPP, EI, Federal and Provincial Taxes.
Other voluntary benefits and contributions.
Page 16: Journal Entry for Payroll Deductions
Example Transaction
Examples include:
Recording of salaries and deductions on March 15:
Debit Salaries Expense: 100,000
Credit various payable accounts as applicable.
Impact on cash flow: None
Page 17: Payment of Salaries
Journal Entry Process
Recording Payment:
Dr. Salary Payable
Cr. Cash
This entry reflects the payment of salaries.
Page 18: Employer Payroll Liabilities Entry
Journal Entry for Employer Liabilities
Examples of Expenses Recorded:
Debit Employee Benefits Expense: 12,033
Further breakdown of CPP, EI, and other payables reflecting employer contributions.
Page 19: Example Payroll Processing
Monthly Payroll Example for BSE Ltd.
BSE Ltd. has total wages of $100,000 with deductions:
Income taxes: $27,000
CPP: $7,500
EI: $8,000
To be paid to government with employer contributions next month.
Page 20: Journal Entry for Paying Employees
Payment Handling
Account Entries:
Reflecting deductions and payment of total wages:
Dr. Salary Expenses, Cr. Various Payable Accounts, Cr. Cash.
Page 21: Recording Employer's Portion of Payroll Expenses
Journal Entry Details
Recorded as:
Dr. Employee Benefits Expenses: 18,700
Cr. CPP Payable and EI Payable based on calculated employer contributions.
Page 22: Government Payment Process
Payment to Government
Journal Entry:
Includes payments of employee deductions to various government entities reflecting employer shares of CPP and EI.
Page 23: Short-Term Notes Payable
Definition
Defined as a promise to pay a certain amount at a future date, often used in place of accounts payable.
Key characteristics include documentation, interest, and classification based on maturity.
Page 24: Current Maturities of Non-Current Debt
Classification of Liabilities
Portion of long-term debt due within the current year is treated as a current liability.
Page 25: Non-Current Liabilities
Definition and Features
Obligation to pay beyond one year, often involving contractual obligations classified as financial liabilities.
Includes long-term notes, bonds, and leases, which could be secured or unsecured.
Page 26: Statement Presentation of Liabilities
Reporting Standards
Current liabilities reported first in financial statements and listed by order of liquidity.
Non-current liabilities should be separately identified and reported at amortized cost.
Page 27: Uncertain Liabilities
Characteristics and Examples
Events with unspecified outcomes regarding obligations, timing, or amounts owed.
Provisions and contingent liabilities comprehensively explained regarding IFRS and ASPE standards.
Page 28: Analysis of Debt Obligations
Financial Metrics
Liquidity Measures: Current ratio, inventory turnover, and receivables turnover ratios.
Solvency Measures: Debt to total assets and times interest earned to assess long-term ability to pay obligations.
Page 29: Debt to Total Assets Ratio
Understanding Financial Leverage
Shows how much of a company's assets are funded by debt.
Formula: Total Liabilities divided by Total Assets.
A lower ratio indicates better financial health.
Page 30: Times Interest Earned
Indicator of Financial Stability
Provides insight into the ability to pay interest on debt through earnings.
Calculation: (Profit + Interest Expense + Income Tax Expense) ÷ Interest Expense.
A higher value indicates better financial stability.
Page 31: Operating Leases
Lease Accounting
Treated as periodic rentals with no ongoing asset or liability recording.
Typically short-term, otherwise classified as off-balance-sheet financing, necessitating disclosure in financial statements.