ac101_ch9 - Revised July 2008 ACC101 CHAPTER 9 Accounting...

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Revised July 2008 Page 1 of 13 ACC101 – CHAPTER 9 Accounting for Current Liabilities
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Revised July 2008 Page 2 of 13 Key Terms and Concepts to Know Liabilities Definition Past/Present/Future elements Classification Current Long-term Uncertainty Amount Payee Payment date Types of known liabilities Estimated liabilities Contingent liabilities
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Revised July 2008 Page 3 of 13 DEFINITION AND PAST/PRESENT/FUTURE ELEMENTS 1. A liability is a debt owed to a third party; a company cannot have a liability to itself. 2. A liability requires all three of the following elements to be present in order to be recorded: a PAST event must have occurred which results in PRESENT obligation to pay a third party which will be paid at some FUTURE date. 3. A liability may be satisfied by the exchange of cash or other assets or by providing services. 4. For example, when a company turns on the lights, electricity is consumed (PAST) which results in an amount owed to the utility (PRESENT) which will be paid after the invoice arrives (FUTURE). CLASSIFICATION 1. Just as for assets, liabilities are classified as current or long-term, depending on the due date. 2. Current liabilities are due to be paid within the next twelve months. 3. Long-term liabilities are due to be paid after the next twelve months have passed. 4. Liabilities which require payments during the next twelve months and after the next twelve months must be analyzed and separated into their current and long-term components. For example, a contract for marketing services which requires a series of 5 annual payments beginning at the end of the first year would be recorded as both a current liability for the first payment and a long-term liability for the subsequent 4 payments. UNCERTAINTY Uncertainty arises because a liability may be incurred before all the facts are known. For example, an insurance company insures homes in an area known to have frequent tornadoes. The insurance company knows that a tornado will occur at some time in the future. However, the insurance company does not know when the tornado will occur (WHEN TO PAY), how severe the resulting damage will be (HOW MUCH TO PAY) or whose homes will be damaged (WHOM TO PAY). However, the insurance company is required to use its best judgment and record an estimated liability for the future claims payments.
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Revised July 2008 Page 4 of 13 KNOWN LIABILITIES Known liabilities involve little, if any, uncertainty. Whom to pay, when to pay and how much to pay are definitely determinable. In previous chapters, many of the most common known liabilities have been discussed: Accounts Payable Sales Taxes Payable Unearned Revenues Known liabilities include short-term notes payable.
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This note was uploaded on 06/01/2011 for the course ACCOUNTING 101 taught by Professor All during the Spring '11 term at Harper.

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ac101_ch9 - Revised July 2008 ACC101 CHAPTER 9 Accounting...

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