Principles of Accounting I Chapter 10 Notes - Chapter 10 I Liabilities debts or obligations arising from past transactions or events that require

Principles of Accounting I Chapter 10 Notes - Chapter 10 I...

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Chapter 10 I. Liabilities: debts or obligations arising from past transactions or events that require settlement at a future date. A. Liabilities VS. Owners Equity: Liabilities eventually mature (or come due) whereas Owner’s Equity does not. B. Creditors are Providers of borrowed capital (liabilities). a. Creditors usually do not have the right to control business operations. They have a financial claim against the business. Creditors’ financial claim has legal priority over the claims of owners. Therefore, owners get what is left over after creditors have been paid if the business goes bankrupt. C. Collateral: Pledged assets to secure specific liabilities D. Only interest accrues as of the balance sheet date appears as a liability in the borrower’s balance sheet. E. The date on which a liability comes due is called the maturity date. II. Current Liabilities: obligations that must be paid within one year or within the operating cycle, whichever is longer. A. These current liabilities usually arise from routine operating transactions. Current liabilities are expected to be paid from current assets (or services). If these two conditions are not met, the liabilities are classified as long-term or noncurrent liabilities B. Examples: accounts payable, short-term note payable, the current portion of long-term debt, accrued liabilities [interest payable, income taxes payable, payroll liabilities], and unearned revenue. C. Note Payable a. Interest = Principal * Rate * Time b. Initially, a liability is recorded only for the principal amount of the note. As interest accrues over time, a short term liability is created for the interest.

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