Chapter 9 Review. Liabilities

Financial Accounting

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Chapter 9 Financial Accounting I. Characteristics of Liabilities I.A. Defining Liabilities 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: A past transaction or event. A present obligation. A future payment of assets or services. Liabilities do not include all expected future payments. For example, most companies expect to pay wages to their employees in upcoming months and years, but these future payments are not liabilities because no past event such as employee work resulted in a present obligation. I.B. Classifying Liabilities I.B.a. Current Liabilities (also called short-term liabilities ) , Are obligations due within one year or the company’s operating cycle, whichever is longer. They are expected to be paid using current assets or by creating other current liabilities. 1
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Chapter 9 Financial Accounting Common examples of current liabilities are accounts payable, short-term notes payable, wages payable, warranty liabilities, lease liabilities, taxes payable, and unearned revenues. I.B.b. Long-Term Liabilities A company’s obligations not expected to be paid within the longer of one year or the company’s operating cycle. They can include long-term notes payable, warranty liabilities, lease liabilities, and bonds payable. They are sometimes reported on the balance sheet in a single long-term liabilities total or in multiple categories. A single liability also can be divided between the current and noncurrent sections if a company expects to make payments toward it in both the short and long term. Liabilities that do not have a fixed due date but instead are payable on the creditor’s demand are reported as current liabilities because of the possibility of payment in the near term. I.C. Uncertainty in Liabilities Point: An accrued expense is an unpaid expense that is also a liability. This is the reason accrued expenses are also called accrued liabilities . I.C.a. Uncertainty in Whom to Pay A company can create a liability with a known amount when issuing a note that is payable to its holder. In this case, a specific amount is payable to the note’s holder at a specified date, but the company does not know who the holder is until that date. Despite this uncertainty, the company reports this liability on its balance sheet. I.C.b. Uncertainty in When to Pay A company can have an obligation of a known amount to a known creditor but not know when it must be paid. For example, a legal services firm can accept fees in advance from a client who plans to use the firm’s services in the future. This means that the firm has a liability that it settles by providing services at an unknown future date. Although this uncertainty exists, the legal firm’s balance sheet must report this
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Chapter 9 Review. Liabilities - Chapter 9 Financial...

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