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Lecture Financial accounting (15/e) - Chapter 10: Liabilities

After completing this chapter, students will be able to: Define liabilities and distinguish between current and long-term liabilities, account for notes payable and interest expense, describe the costs and the basic accounting activities relating to payrolls, prepare an amortization table allocating payments between interest and principal,. | Liabilities Chapter 10 Chapter 10: Liabilities The Nature of Liabilities Defined as debts or obligations arising from past transactions or events. Maturity = 1 year or less Maturity > 1 year Current Liabilities Noncurrent Liabilities Liabilities are debts owed from past transactions. Liabilities can be separated into two categories: Current and Non-current. Current liabilities are due to be paid within one year or the normal operating cycle of the business, whichever is longer. For most businesses, one year is longer than the operating cycle. Noncurrent liabilities are due to be paid sometime after one year. Distinction Between Debt and Equity The acquisition of assets is financed from two sources: Funds from creditors, with a definite due date, and sometimes bearing interest. Funds from owners. A company can finance its operations from two sources. One is debt. Debt is a borrowing from a creditor, such as a bank. It has a definite due date and in most cases bears an interest rate. Another way a company can finance its operations is through equity. This requires companies to sell additional stock in the company to new or existing shareholders. Estimated Liabilities Estimated liabilities have two basic characteristics: The liability is known to exist, The precise dollar amount cannot be determined until a later date. Example: An automobile warranty obligation. An estimated liability has two basic characteristics: (1) the liability is known to exist, and (2) the precise dollar amount cannot be determined until a later date. An example of an estimated liability is the warranty associated with a new car provided by the manufacturer. The warranty usually extends for a number of years. As each car is sold, the automaker incurs a liability to perform any work that may be required under the warranty. The dollar amount of the liability, however, can only be estimated at the date of sale. Short-term obligations to suppliers for purchases of merchandise and to others for . | Liabilities Chapter 10 Chapter 10: Liabilities The Nature of Liabilities Defined as debts or obligations arising from past transactions or events. Maturity = 1 year or less Maturity > 1 year Current Liabilities Noncurrent Liabilities Liabilities are debts owed from past transactions. Liabilities can be separated into two categories: Current and Non-current. Current liabilities are due to be paid within one year or the normal operating cycle of the business, whichever is longer. For most businesses, one year is longer than the operating cycle. Noncurrent liabilities are due to be paid sometime after one year. Distinction Between Debt and Equity The acquisition of assets is financed from two sources: Funds from creditors, with a definite due date, and sometimes bearing interest. Funds from owners. A company can finance its operations from two sources. One is debt. Debt is a borrowing from a creditor, such as a bank. It has a definite due date and in most cases bears an interest rate. .