accounting.docx - COURSE CODE BAF3110 COURSE TITLE...

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COURSE CODE: BAF3110 COURSE TITLE: ACCOUNTING FOR LIABILITIES REG.ELD/B/BBM/112/05483 a) Current liabilities are short-term obligations that usually must be paid from current assets within a year. The following are types of current liabilities: Accounts payable i. Tax payable ii. Accrued expenses iii. Notes payable iv. Advance payment from customers i) Accounts payable: This is a liability account that identifies an obligation to pay suppliers in the near future. It represents debts that the firm incurs in purchasing inventories and supplies as well as amounts that the firm owes for other services used in its operations such as insurance, rentals, utilities etc. Managing accounts payable well can help cut costs. ii) Note payable: These are short-term obligations represented by promissory notes. A company may sign promissory notes to obtain bank loans, pay suppliers for goods and services, or secure credit from other sources. Usually business firms frequently borrow funds from banks or other lenders by signing. iii) Discounts: Suppliers frequently offer discounts for early payment and the discount rates are usually high enough to induce customers to pay promptly. If the buyer intends to pay within the discount period, then the inventory is usually recorded at its cost, net of the discount. iv) Tax payable: Business firms pay taxes on their incomes. The amount of the liability depends on the results of a corporation’s operations which are often not known until after the end of the corporation’s fiscal
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year. However, because income taxes are an expense in the year in which income is earned, an adjusting entry is necessary to record the estimated tax liability. b) A lease is an agreement conveying the right to use property, plant, or equipment (land and/or depreciable assets), usually for a stated period of time. Leasing affords a variety of advantages for lessee and they include: i. Leasing can provide income tax advantages derived from accelerated depreciation and interest expense. ii. It may also enable the lessee to avoid owning assets that are needed only temporally or seasonally. iii. Leasing may resolve lessee’s cash problems by making financing available for up to 100% of the leased assets value. iv. Leasing transactions can be structured as operating leases, providing off-balance sheet financing not subject to debt covenant restrictions.
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