Accouting Final Review

Accouting Final Review - Chapter 11- Liabilities Current...

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Chapter 11- Liabilities Current liability- debt with two keys features o Company reasonably expects to pay the debt from existing current assets or through the creation of other liabilities o The company will pay the debt within one year or the operating cycle whichever is loner Debts that do not meet both criteria are classified as long term liabilities Current liabilities include notes payable, accounts payable, and unearned revenue and also include accrued liabilities such as taxes, salaries and wages and interest payable. Notes payables- written promissory notes in which companies record obligations; often used instead of accounts payable because they give the lender legal proof of the obligation incase legal remedies are needed to collect debt. Notes due for payment within one year of the balance sheet date are usually classified as current liabilities. Interest = Face value of note x annual interest rate x time in terms of one year Under most state sales tax laws the selling company must ring up separately on the cash register the amount of the sale and the amount of sales tax collected. Some times companies divide total recipts by 100% plus the sales tax percentage. Wages and salaries payable – amount of wages and salaries owed to employees Until a company remits withholding taxes (fed and state income taxes and SS taxes) to the governmental taxing authorities they are credited to appropriate liability accounts (debit salaries and wages expense) With every payroll the employer incurs liabilities to pay various payroll taxes levied upon the employer. (Debit payroll tax expense and credit payables) Unearned revenues- revenues that are received before the company delievers goods or provides services. To fix this companies: o Debits cash, and credits a current liability account identifying the source of unearned revenue
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o When company earns the revenue, it debits Unearned revenue and credits an earned revenue account Current liabilities are listed in order of magnitude, with largest first. (mostly notes payable, accounts payable) Working capital- excess of current assets over current liabilities ( = Current assets – current liabilities) Current ratio- permits us to compare the liquidity of different sized companies and of a single company at different times ( = current assets / current liabilities) Long term liabilities – obligations that are expected to be paid after one year. Bonds- a form of interest bearing notes payable. Advantages of bonds over common stock: o Stockholder control is not affected o Tax savings result o Earnings per share may be higher A disadvantage of using bonds is that the company must pay interest on a periodic basis. Also, a company must repay the principle at the due date. Secured/ Unsecured Bonds
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Accouting Final Review - Chapter 11- Liabilities Current...

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