Chapter 10 Acc Notes.docx - Objectives 1 5 pages 47 69 The Role of Liabilities Liabilities play a significant role in financing business activities

Chapter 10 Acc Notes.docx - Objectives 1 5 pages 47 69 The...

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Objectives 1 - 5, pages 47 - 69 The Role of Liabilities Liabilities play a significant role in financing business activities Created when a company buys goods and services on credit, obtains short-term loans to cover gaps in cash flows, and issues long-term debt to obtain money for expanding into new regions and markets Classified balance sheet is the financial statement used to know when liabilities are to be repaid Current Liabilities short-term obligations that will be paid in cash (or fulfilled with other current assets) within 12 months or the next operating cycle, whichever is longer Liabilities that are due within one year Measuring Liabilities The amount reported for each liability is the result of three factors: 1. The initial amount of the liability a. The initial amount of cash a creditor would accept to settle the liability after a transaction or event creates the liability 2. Additional amounts owed to the creditor a. Increases liabilities when additional obligations arise (purchasing goods & services, receiving customer deposits, or incurring interest charges over time) 3. Payments or services provided to the creditor a. Decreases liabilities whenever the company makes a payment or provides services to the creditor The liability is first recorded at the amount initially owed, excludes interest charges Interest arises only when time passes ! Not the day the company purches an item on account or the day the company receives a loan Current Liabilities Accounts Payable Increased (credited) when a company receives goods or services on credit Decreased (debited) when the company pays on its account Typically no interest Accrued Liabilities Liabilities for expenses that have been incurred but not paid at the end of the accounting period Can include other unpaid expenses. Like advertising, corporate income tax, interest, payroll tax, and warranties Accrued Payroll Payroll Deductions The amounts subtracted from employee’s gross earnings to determine their net pay Gross earnings are computed by the time worked multiplied by pay rate These deductions include income tax, FICA tax, and charitable donations Net Pay equals gross earnings minus payroll deductions
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Your employer is obligated to remit those deductions to another organization or government agency on your behalf Payroll deductions create current liabilities FOR YOUR EMPLOYER Employer Payroll Taxes Like their employees, all employers are required to pay FICA taxes Required to may 100% of total employee contributions (matching contributions) and pay unemployment taxes Employers are required by the Federal Unemployment Tax Act (FUTA) and State Unemployment Act Tax (SUTA) Reported as an additional operating expense on the income statement Until they have been paid, the liabilities for these taxes are recorded in current liability accounts: State unemployment tax (SUTA) not paid by the employee, PAID BY THE EMPLOYER
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