ACCOUNTING 113 MODULES ACCOUNTANCY DEPARTMENT

1. Liabilities -present obligations of an entity arising from past transactions or events, the
settlement of which is expected to result in an outflow of resources embodying economic
benefits from the entity.

a.) Present Obligations- existing duty or responsibility to act or perform in a certain way.
b.) Of a particular entity- for liability to exist, the entity liable must be identified; the individual
or entity owed need not be specifically known.
c.) Arising from past transactions or events- the liability is not recognized until it is incurred; the
past event that leads to the recognition of a liability is known as the obligating event.
-Statutory/legal (i.e. tax payable)
*obligating event - contractual (i.e. Accounts Payable)
-constructive (i.e. Warranties)
(a)- By reason of normal business s practice, custom and a desire to maintain good
business relations or act in an equitable manner.
d.) Its settlement requires an outflow of resources embodying economic benefits- including:
*payment of cash
* Transfer of non-cash assets
*provision of services
* Replacement by another liability
* Conversion of the obligation into equity

Implications of the definition- for a liability to exist:

a.) the exact amount of the obligation need not be known
b.) The date of maturity need not be set

Analysis: premium liability; future purchases versus purchase commitments, stock dividends
payable

2. Measurement of Liabilities- at initial recognition, an entity is given an option, which is

irrevocable, to measure a financial liability between the following:

* Initial measurement Fair value Option Amortized Cost

At FV (a) at FV less TC (b)
Note:
* (a) - conceptually, equal to the PV of all future cash payment to settle the obligation
* (b) - incremental costs that are directly attributable to the issue of a financial liability
YES: * fees and commissions paid to agents, etc. NO: *debt premiums or discounts
* Levies by regulatory agencies * financing costs
* transfer taxes and duties * internal administrative or holding costs

*Subsequent measurement at FV at amortized cost

*FV Changes recognized in P/L or OCI ignored/ not recorded
*amortization of discount/ no longer applies applies using the effective
premium interest
* interest expense I/E is based on N/R I/E is based o E/R

*liability short-term- financing PV amortized cost

- other than financing- face value face value
long-term- interest bearing - realistic face value face value
- unrealistic PV amortized cost
non-interest bearing - PV amortized cost

3. Classification of Liabilities- under PAS 1, liabilities is classified into two, namely:

a.) Current Liabilities- * trade and other payables

*current provisions
* Short-term borrowings
* Current portion of long-term debt
*current tax liability

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b.) Non-current Liabilities- * non-current portion of long-term debt

* finance lease liabilities
* deferred tax liability
* Long-term deferred revenue
* Long-term obligation to entity officers

When is a liability Current- an entity shall classify a liability as current when:

a.) The entity expects to settle the liability within the entity's operating cycle (assumed to be 12
months if unidentifiable)

*Liability -trade- within 1 year or operating cycle whichever is longer (a)

- Non-trade- within 1 year except if (b)

 (a) - trade payables and accruals for employee and other operating costs are
classified as current even if they are settled more than 12 months after the
reporting period as they are used in the entity's normal operating cycle

b.) The entity holds the liability primarily for the purpose of trading such as a quoted debt
instrument that the issuer may buy back.
c.) The liability is due to be settled within 12 months after the reporting period.
d.) The entity doesn't have an unconditional right to defer settlement of the liability for at least
12 months after the reporting period.

* refinancing agreements (a) - existing part of the loan agreement- liability is non- current b
(Inc. rolling over) - non-existing part of an agreement- see rule below

* breach of covenants (c) - see rule below

(a)- Replacement of an existing debt obligation with another debt obligation under
different terms.
(b)- provided the discretion to refinance rests with the entity
(c)- Borrowing agreements often have covenants attached to it; once breached, the
liability becomes payable on demand

+disclosure in NSTF
Liability is Non-current Liability is still current Liability is still current

YE date of FS Issuance

Refinancing/ rolling over after

Is completed or grace period before after
Agreed upon

On or before

4. Trade and other payables- a line item for accounts payable, notes payable, accrued interest
on note payable, dividends payable and accrued expenses.
= no obligation can be raised if trade accounts and notes payable are separately presented.

Accounts Payable- amounts owed by an entity to its supplier of products and services
purchased on credit and not evidenced by a promissory note.
= shipping term; debit balances in supplier’s account

Accrued Liabilities- are expenses already incurred by an entity but not yet paid for (i.e. accrued
salaries, wages, interest and others)
= related invoice, contractual agreements, billing statements, and other supporting
documents

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ACCOUNTING 113 MODULES ACCOUNTANCY DEPARTMENT

5. Payroll Taxes- under our law, the entity as an employer is required to withhold from the
salaries of each employee the following:

a.) Income tax payable

b.) Employee contribution to the Social Security System
c.) Employee contribution for Phil Health
d.) Employee contribution to the Pag-Ibig Fund
= Other deductions may also be made by the employer such as union does
=These deductions + the employer's share (b, c, d) are recognized as current liabilities prior to
remittance to concerned agencies.

Pertinent Entries:
a.) Payroll for the month: Salaries Expense/ DL xx
Income Tax withheld xx
SS/Pag-ibig/Phil Health Payable xx
Cash/ Salaries Payable xx

b.) Employer's share: Payroll Tax Expense xx

SS/Pag-ibig/Phil Health Payable xx

c.) Remittance of payroll tax liabilities : Income Tax Withheld xx

SSS/Pag-ibig/Phil Health Payable xx
Cash xx

Formulas:
* salaries expense= gross payroll earned

*payroll tax expense= employer's share

*payroll tax liability= income tax withheld + SS/Pag-ibig/Phil Health Payable (both employee
and employer's share)

* payroll liability= unpaid net pay+ payroll tax liability

6. VAT (Value Added Taxes) - taxes on sales of tangible personal property a d certain services
which are collected and remitted monthly to the BIR.

a.) Output VAT- liability (sales x 12%)

b.) Input VAT- Offset to output tax (purchases x 12%)

NOTE: * If sales is VAT inclusive- (sales ÷ 1.12) x 12%

* If per receipt/invoice-meaning, amount is VAT inclusive

Pertinent Entries:
a.) Sale transactions: Cash/Accounts Receivable xx
Sales xx

b.) Purchase transactions: Purchases xx

Input VAT xx
Cash/Accounts Payable xx

c.) Every month-end: Output Tax xx

Input Tax xx
VAT Payable xx

7. Bonus- compensation given to key officers and employees to motivate them by relating
directly their well-being to the success of the entity.

Entry: Bonus Expense/Salaries Expense xx

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ACCOUNTING 113 MODULES ACCOUNTANCY DEPARTMENT

Cash/Bonus Payable/Salaries Payable xx

Formulas : Bonus computation usually has four variations:

a.) Bonus is expressed as a certain percent of income before bonus and before tax
* Bonus= Income (I) x Bonus Rate (R)

b.) Bonus is expressed as a certain percent of income after bonus but before tax
*Bonus= [I/(1+R)] x R

c.) Bonus is expressed as a certain percent of income after bonus and after tax
*Bonus=I x [R x (1-T)]/ 1 + [R x ( 1-T)]

d. )Bonus is expressed as a certain percent of income after tax but before bonus
* Bonus= I x [R x (1- T)]/1 - ( R x T)

NOTE: at times, bonuses are based not on the entire income earned but on the excess of the CY
income over a specified level

8. Escrow Liability- amount held by the escrow agent in an escrow agreement

Formula:

Escrow Liability
Amounts paid out of the escrow account Beginning Balance
Service fee of escrow agent Escrow Payments
Interest on the escrow

Ending Balance

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