Economic resource is an asset, thus, the

Chapter 1: Liabilities term share dividends payable are

LIABILITIES
Liabilities are 1. Present obligations of an
entity 2. To transfer an economic resource
3. As a result of past events.
considered as an accounting liability,
because the obligation is to issue an entity's
own share. Thus, dividends payable is
classified as an equity rather than
accounting liability.

1. An obligation is a responsibility that an

entity has no practical ability to avoid.
Present obligations may be legal
constructive.
A legal obligation arises because of a
binding contract or statutory requirement.
Legal Example: (Statutory requirement) To
pay tax, (Binding contract) To pay the
entity’s accounts payable.
The constructive obligation arises by the
reason of conducting a normal business
practice, a desire to alleviate or maintain
good business relations.
3. Liability only arises on past events
because the liability is not recognized until it
or is incurred.
Obligating events creates a present
obligation as a result of an event that has no
alternative solution but to settle the
obligation created by the event.
Ex. When an entity tries to secure a loan, an
obligating event only arises, when the cash
has already been received.
Measurement of liabilities

Constructive Example: As the entity Initial Subsequent

promotes its sales, the entity must conduct
Short-term - FV FV
some sort of gimmick like, buy 1 take 1 or
Interest
50% off, therefore, entity’s obligated to bearing
deliver their goods or services lower than
the original price. Short-term - FV FV
Non Interest
The payee to whom the obligation is owed, Bearing
the time, and the no. of individuals that
Long-term - FV FV
entities oblige into are not necessarily
Interest
needed. bearing
2. Economic resource is the asset that Long-term - PV Amortized
represents a right with a potential to Non Interest
produce economic benefits. Bearing

Obligation must be to pay cash, non-cash,

or provide a service at some future time.
Example of Liabilities
A. Accounts payable.
B. Withholding tax or incentives.
C. Accrued payable.
D. Dividends payable (excluding
share dividends payable)
E. Advances from the customer.
F. Debt payable like notes,
mortgage, and bonds
G. Income tax payable
H. Deferred or Unearned revenue
Current liabilities
Current liabilities shall be classified when
one of the following arises:
A. The entity expects to settle it
within the operating cycle.
B. The entity holds the liability
primarily for the purpose of
TRADING.
C. The liability is due to be settled
within 12 months after the
reporting period.
D. The entity does not have the right
at the end of the reporting period
to defer settlement of the liability
for at least 12 months after the
reporting period.
Noncurrent liabilities
The term noncurrent liabilities is a residual
definition, meaning that if it's not classified
as current, it'll be classified as noncurrent.
Noncurrent liabilities include the ff:
A. Noncurrent portion of long-term
debt
B. Finance lease liability
C. Deferred tax liability
D. Long-term obligation to officers
E. Long -term deferred revenue
Long-term debt falling due within a year.
Basically, the long-term debt falling due
within a year is reclassification of a
long-term liability.
If the entity decides that they would
refinance, the liability that is falling within a
year, it will be classified as still non-current
liability, if they decided not to, the liability will
be reclassified as current liability; still, it will
depend on the contract on who has the right
of the power in the liability.
A. Original term was for a period longer
than 12 months.
B. An agreement to refinance or to
reschedule payment on a long-term
basis is completed after the reporting
period and before the financial
statements are authorized for issue.
Covenants
Covenants are often attached to borrowing
agreements which represent undertakings
by the borrower.
These covenants are restrictions on the
borrower as to undertaking further
borrowings, paying dividends, maintaining
specified level of working capital and so Income less: Bonus = After bonus x Bonus
forth. rate

Breach of covenants

If a certain condition has been breached,

the liability becomes payable on demand.

This liability is classified as current because

at the end of the reporting period, the entity
does not have the right to defer settlement
for at least 12 months after the end of the
reporting period.

However, the liability is classified as

noncurrent if the lender agreed on or before
the end of the reporting period to provide a
grace period ending at least 12 months after
the end of the reporting period.

Grace period

Is the period within which the entity can

rectify the breach and during which the
lender cannot demand immediate payment.

Est. liabilities

Are obligations which exist at the end of the

reporting period although their amount is not
definite.

Deferred or Unearned revenue

Is an income already received but not yet

earned. It may be realizable within a year or
more than a year after the end of the
reporting period.

Bonus Computation

Before bonus and tax

Income x Bonus

After bonus but before tax