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Lecture Fundamental accounting principles (20/e): Chapter 11 - Wild, Shaw, Chiappetta

Chapter 11 - Current liabilities and payroll accounting. After completing this chapter you should be able to: Describe current and long-term liabilities and their characteristics, identify and describe known current liabilities, explain how to account for contingent liabilities, compute the times interest earned ratio and use it to analyze liabilities, prepare entries to account for short-term notes payable. | Chapter 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING Chapter 11: Current Liabilities and Payroll Accounting DEFINING LIABILITIES C 1 A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events. This definition includes three crucial factors: 1. A past transaction or event. 2. A present obligation. 3. A future payment of assets or services. CLASSIFYING LIABILITIES Expected to be paid within one year or the company’s operating cycle, whichever is longer. Current Liabilities Not expected to be paid within one year or the company’s operating cycle, whichever is longer. Long-Term Liabilities C 1 Current liabilities are expected to be paid within one year or the normal operating cycle of the company, whichever is longer. Current liabilities are usually extinguished by payment of current assets. Long-term liabilities are not expected to be paid or extinguished within one year. In this chapter, we will concentrate on current liabilities. UNCERTAINTY IN LIABILITIES Uncertainty in When to Pay C 1 Uncertainty in Whom to Pay Uncertainty in How Much to Pay Before we can determine the nature of a liability and properly classify it, we must examine three major uncertainties. First, we must determine whether we know who will be paid to extinguish the liability. Second, we must know when the amount must be paid, and third, we must know exactly how much must be paid to extinguish the liability. If we don’t know all three, we do not have a determinable liability. Accounts Payable Sales Taxes Payable Unearned Revenues Short-Term Notes Payable KNOWN LIABILITIES Payroll Liabilities Multi-Period Known Liabilities C 2 Most liabilities arise from situations with little uncertainty. They are set by agreements, contracts, or laws and are measurable. These liabilities are known liabilities, also called definitely determinable liabilities. Known liabilities include accounts payable, notes payable, . | Chapter 11 CURRENT LIABILITIES AND PAYROLL ACCOUNTING Chapter 11: Current Liabilities and Payroll Accounting DEFINING LIABILITIES C 1 A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events. This definition includes three crucial factors: 1. A past transaction or event. 2. A present obligation. 3. A future payment of assets or services. CLASSIFYING LIABILITIES Expected to be paid within one year or the company’s operating cycle, whichever is longer. Current Liabilities Not expected to be paid within one year or the company’s operating cycle, whichever is longer. Long-Term Liabilities C 1 Current liabilities are expected to be paid within one year or the normal operating cycle of the company, whichever is longer. Current liabilities are usually extinguished by payment of current assets. Long-term liabilities are not expected to be paid or extinguished within one year. In this chapter, we .