The Nature of Liabilities

A. Definitions of Liabilities
Liabilities are probable future
sacrifices of economic benefits arising
from present obligations of particular
entity to transfer assets or provide
services to other entities in the future
as result of past transactions or
events.
B. Characteristics of a Liability

1) It is a present obligation that entails

settlement by probable future transfer
or the use of cash, goods, or services
2) It is an unavoidable obligation
3) The transaction or event creating the
obligation has already occurred
C. The Types of Liabilities
1) Current liablities
Current liabilities are obligations which
liquidation is reasonably expected to require
use of existing resources properly classified
as current assets, or the creation of other
current liabilities or due to within shot time
usually within one year.

2) Long Term Debt

Long term debt are liabilities that are due to
over one years.
 CURRENT LIABILITIES

Transactions caused by current liablities are:

1. Receiving goods or services prior to make payment
2. Receiving payment prior to deliver goods or services

The examples of current liablities are:

1 Account payable/trade account
payable refinanced
2 account payable refinanced
3 Taxes payable
7 Current maturities of long term
debt
8 Short term obligatio xpected to
be refinanced
9 Dividends payable

4 Interest payable 10 Customer advances and deposits

5 Wages Payable 11 Income taxe payable
6 Notes payable
ACCOUNTING FOR CURRENT
LIABILITIES
1. Account payable/trade account payable
Liablities emerge from merchandise purchasing for resale
or
The amount owed to others for goods, supplies, or services
purchased on open account.
Ex: Assume that on July, 10, 2008 Boys Company
purchased merchandise from Trade Company Rp.
10.000.000, term 2/10,n/30, FOB Destination
Transactons above record as follows;
(in Rp)
Date Description Reff. Debit Credit
2008
July 10 Merchandise 10,000,000
Inventory
Account Payable 10,000,000
2. Unearned rent
Liabilities emerge from the receipt of rent in
advance

3. Taxes payable
The amount of taxes owed to governmental units

4. Interest payable
The amount of interest owed on borrowed funds

5. Wages payable
The amount owed to employees
 ACCOUNTING FOR CURRENT LIABILITIES
1.Account payable/trade account payable
• Liablities emerge from purcahes of merchandise for
resale
• The amount owed to others for goods, supplies, or
services purchased on open account.
• Example : Assume that on July, 10, 2008 Boys Company
purchase merchandise from Trade Company Rp.
10.000.000, term 2/10,n/30, FOB Destination
• The entry to record is:

Date Description Reff. Debit Credit

2008
July 10 Merchandise Inventory 10,000,000
Account Payable 10,000,000
2. Unearned revenue
- Liabilities arising from the receipt of cash in advance
- Accounting treatment for unearned revenue are follows:
1. When the advance is received , Cash is debited, and
current liability account identifying the source of unearne
reenue credited
2. When the revenue is earned, the unearned revenue
account is debited, an earned revenue account is credited
- Example : Assume that on August, 10, 2008 Permata
Airlines, Co sells 100 tickets at Rp. 500.000 each for flying
at Oct, 25, 2008
- The entry for record the sales of tickets is:
(in Rp)
Date Description Reff. Debit Credit
2008
August 10 Cash 50,000,000
Uneaned tickets revenue 50,000,000
 • The entry to record services which completed to
customers
(in Rp)
Date Description Reff. Debit Credit
2008
Oct 25 Unearned ickets revenue 50,000,000
Ticktes revenue 50,000,000

3. Taxes Payable
• The amount of taxes owed to governmental units
• The tax is expressed as stated percentage of the sales
price
• Example :
Assume that on August, 10, 2008 Regent Mart, sell
merchandise Rp. 28.000.000 an sales taxes 10%.
• The entry for record the sales of merchandise is:
(in Rp)
Date Description Reff. Debit Credit
2008
August 10 Cash 30,800,000
Sales taxes payable 2,800,000
Sales 28,000,000
4. Notes Payable
• Notes payable is obligation in the form of written
promissory notes
• It is often used instead of account payable
• Example :
• Well Mart, Co agrees to borrow Rp. 100.000.000 from
BCA Bank. On Oct, 1, 2008, Well Mart , Co sign a Rp.
100.000.000, 12%, 4-month notes.
• The entry for record the transaction is:
(in Rp)
Date Description Reff. Debit Credit
2008
Oct 1 Cash 100,000,000
Notes Payable 100,000,000
5. Interest payable
• The amount of interest owed on borrowed
funds
• Example:
• If Well Mart, Co must prepare financial
statement Des, 31, 2008, this company should
recognize interest expense that is not due to.
• The adjusment entry for recording the interest
expense is:
(in Rp)
Date Description Reff. Debit Credit
2008
Des 31 Interest expense 3,000,000
Interest Payable 3,000,000

Note : calculation accrued interest

Rp. 100.000.000 x 3/14 x 12% = Rp. 3.000.000
6. Current maturities of long-term debt
• It is long term debt due within one year
• It is not necessary to prepare an adjuting entries to
recognize the current maturities of long term debt,
but directly presented at balance sheets as current
liablities.

7. Dividends payable
• It is amount owed by company to it stockholders as a
result of board director’s authorization.
• It happens at the date of declaration of dividens.
• Example:
• On January, 25, Well Mart, Co declare to give dividen for
stockholders Rp. 450.000.000 with will bepaid at Feb, 20,
2008.
 (in Rp)
Date Description Reff. Debit Credit
2008
Jan 25 Retained Earning 450,000,000
Dividen Payable 450,000,000

8. Customer advances and deposits

They are deposits received from customer to
guarantee performance of contrac or service or
as guarantees to cover payment of expected
future obligation. For example, Aqua company
may receive deposits from distributors as
guarantees for possible damage to company’s
property – the water containers
9. Income taxes payable
The company’s income taxes
determine on based incomes they
earned during one period and
usually paid three months latter from the end
period.

For example, at Dec, 31, Astira,Co income

taxes is not yet paid Rp. 665.000.000.
The adjusment entry for record the interest
expense is
(in Rp)
Date Description Reff. Debit Credit
2008
Dec 31 Income Taxes Expense 665.000.000
Income Taxes Payable 665.000.000
10. Wages Payable
• At the date of financial reporting, the company
sometimes is not paid salary or wages of their
employees. Instead they have been performed services
for company.
• The company should recognized the expenses of wages
or salary that is not paid
• The adjusment entry for recording the interest expense
is:
(in Rp)
Date Description Reff. Debit Credit
2008
Dec 31 Wages and Salary Expense xxx
Wages and Salaries Payable xxx
Payable
• In the business that has several thousand creditors or
costumers that need information about the balance
amount payable to each creditor or amount owed to
individual costumer.
• To track individual balances, the company uses a
subsidiary ledger.
• A subsidiary ledger is a group of account shared common
characteristic (for example all costumers)
• Two common subsidiary ledgers are:
1. The account receivable (or costumers’) ledger which
accumulates transaction data with individual costumer.
2. The account payable (or creditors’) ledger which
accumulates transaction data with individual costumer.
 • The general ledger account that
summarizes subsidiary ledger data is
called a control account.

• Each general ledger control account

balance must equal the composite balance of the
individual accounts in the related subsidiary
ledger the end of an accounting period.
• Relationship of general ledger and subsidiary accounts

General Account Account Owner’s

Cash Receivable Payable Capital
Ledger

Subsidiary
Ledgers Customer Customer Customer Creditor Creditor Creditor
A B C X X X
 Relationship Beetwen Ledger
Accounts Payable Subsidiary Ledger

ANDA GENERAL LEDGER

Date Ref Debit Credit Balance ACCOUNTs PAYABLE

2008 Date Ref Debit Credit Balance
Jan 10 6.000 6.000 2008
19 4.000 2.000 Jan 31 12.000 12.000
31 8.000 4.000
BANASA
Date Ref Debit Credit Balance
2008
Jan 12 3.000 3.000
21 3.000 0
The subsidiary Accounts payable is
GIOVANI
ledger is separate a control account
Date Ref Debit Credit Balance from the general
2008 ledger
Jan 20 3.000 3.000
29 1.000 2.000
Journalizing and Posting the General Ledger

Karns Wholesale Supply

General Journal
GI
Date Account Titles and Explanation Ref Debit Credit
1996
May 31 Account Payable-Fabor and son 25/√ 500
Purchase returns and Allowances 73 500
(Receivable credit for returned goods)

ACCOUNT PAYABLE SUBSIDIARY LEDGER ACCOUNT PAYABLE SUBSIDIARY LEDGER

Fabor and Son

Fabor and Son
No. 25
Date Ref Debit Credit Balance Date Ref Debit Credit Balance
1996 2008
May 31 PI 63,900 63,900
May 14 PI 6,900 6,900 31 CPI 42,600 21,300
23 CPI 6,900 ………… 31 GI 500 20,800
26 PI 8,700 8,700
31 GI 500 8,200 Purchase Returns and Allowances
No. 73
Date Ref Debit Credit Balance
2008
May 31 GI 500 500
 CONTINGENT LIABILITIES

•Contingent liabilities is a potential liabliy

that may become an actual liablity in the
future
•Guidelines to report contingent liabilities
1. If the contingency is probable – if it is likely to
occur- and the amount can be reasonably
estimated, the liability should be recorded to the
account
2. If the contingency is reasonably probable – if it
is could happen-then it need be disclosed only in
the notes accompanying the financial statements
3. If the contingency is remote – if it is unlikely to
occur – it need not be recorded or disclosed
• Recording a Contingent Liability
• The example of contingent liablities is product
warranties .
• The accounting for warranty cost is based on
the matching principle whichever the estimated cost of
honoring product warranty contracs should be recognizea as an
expense
• Assume that The Plasa Electronic, Co sells 100 washing machines
at Rp. 1.500.000 for each during 2008. The selling price includes
one-year warranty on parts. It is expected that 5 unit of product
sold (5%) will be defective and the average warranty repair cost
will be Rp. 150.000 per unit. In the period of sales, warranty
contracs are honored on 3 unit with total cost Rp. 450.000.
• Computation estimates warranty liablitty as follows:
Number of unit sold 100
Estimated rate of defective units 5%
Total estimated defectve units 5
Average warranty reapir cost Rp. 150.000
Estimated prodct warranty liability Rp. 750.000
• The adjusment entry for recording accrues
warranty cost is:
Date Description Reff. Debit Credit
2008
Dec 31 Warranty Expense 750,000
Wages and Salaries Payable 750,000
Estimated
(to Wararntywarranty
accrue estimated Liability costs)

• The entry for recording repair cost occurs

during the year ( 3 units are repair) is:
(in Rp)
Date Description Reff. Debit Credit
2008
Dec 31 Estimated warranty Liability 450,000
Repairs Parts/Wages Payable 750,000
(to record honoring of 3 waranty contract on 2008
sales)
PRESENTATION OF CURRENT
LIABILITIES

STAR ROCK, CO
BALANCE SHEET
PER DEC, 31, 2008
Current Liabilities (in million rups)
Notes Payable 145
Account Payable 231
Sallaries Payable 422
Taxes Payable 356
Interest Payable 265
Long-term Debt due to within one year 1.567
Total Current Liablities 2.986
 LONG TERM LIABILITY

• Long-term debt consists of probable future sacrifies of

economic benefits emerge from present obligations
that are not payable within a year or the operating
cycle of the company, whichever is longer.
• Long term liabilities commonly include:
1. Bonds payable
• Bonds are a written promisses to pay specified sums of
money at specified times
• Bonds represent a promise to pay:
A. A sum of money at designed maturity date, plus
B. Periodic interest at a specified rate on maturity
amount
• The parties who interested in bondings are:
1. Bondholders (creditors/lenders)
2. Bonds issuer (debitors/borrower)
2. Mortages payable
It is a loan or note that has specific assets of the company (land and
buildings, for example) pledged as security for repayment
3. Pension liability
It is obligation to employees under a pension plan, obligation for
employees compensation in the form of pensions to be paid in the future
4. Long-term notes payable
Long-term notes payable is obligation in the form of written promissory
notes that are not payable within a year or the operating cycle of the
company, whichever is longer.
5. Long term-lease obligation
Long term-lease obligation is obligation emerges from lease property,
plant or equipment that are not payable within a year or the operating
cycle of the company, whichever is longer.
6. Deffered income tax liablities
It is obligation emerging from different calculation of income tax, caused
diferrenciation of accounting treatment between tax law with generally
accepted accounting standar. That is not payable within a year or the
operating cycle of the company, whichever is longer.