Liabilities

Chapter 10

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights

The Nature of Liabilities

Defined as debts or obligations arising from

past transactions or events.

Maturity = 1 year or less Maturity > 1 year

Current Noncurrent
Liabilities Liabilities

10-2
Estimated Liabilities
Estimated liabilities have two basic
characteristics:
1.The liability is known to exist,
2.The precise dollar amount cannot be
determined until a later date.

Example: An automobile
warranty obligation.

10-3
Current Liabilities: Accounts
Payable
Short-term obligations to suppliers for
purchases of merchandise and to others for
goods and services.

Merchandise Office
inventory supplies
invoices invoices
Examples
Shipping Utility and
charges phone bills

10-4
Current Liabilities: Notes
Payable
When a company borrows money, a note payable is
created.
Current Portion of Notes Payable
The portion of a note payable that is due within one year,
or one operating cycle, whichever is longer.

Current Notes Payable

Total Notes
Payable
Noncurrent Notes Payable

10-5
Accrued Liabilities
Accrued liabilities arise from the recognition of
expenses for which payment will be made in the
future. Accrued liabilities are often referred to as
accrued expenses.

Examples include:
1.Interest payable,
2.Income taxes payable, and
3.Accrued payroll liabilities.

10-6
 Payroll Liabilities
Gross Pay

Net Pay

State and Local Voluntary

Medicare Federal Income Taxes Deductions
FICA Taxes
Taxes Income Tax
10-7
Unearned Revenue
Cash is sometimes collected from the customer
before the revenue is actually earned.

As the earnings
process is
completed

Cash is
received
in
advance.

a liability account.
10-8
Long-Term Liabilities

Relatively small debt needs can

be filled from single sources.

Banks or Insurance Companies or Pension Plans

10-9
Long-Term Liabilities

Large debt needs are often filled by

issuing bonds.

10-10
Installment Notes Payable

Long-term notes that call for a series of

installment payments.

Each payment covers With each payment, the

interest for the period interest portion gets smaller
AND a portion of the and the principal portion gets
principal. larger.

10-11
Bonds Payable
Bonds
 Bonds usually
usually involve
involve the
the
borrowing
borrowing of of aa large
large sum
sum ofof
money,
money, called
called principal.
principal
principal.
principal
The
 The principal
principal isis usually
usually paid
paid
back
back asas aa lump
lump sum sum at
at the
the end
end
of
of the
the bond
bond period.
period.
Individual
 Individual bonds
bonds are are often
often
denominated
denominated with with aa par
par value,
value,
or
or face
face value,
value of
value
value, of $1,000.
$1,000.

10-12
Bonds Payable
Bonds usually carry a stated rate of interest,
also called a contract rate.
rate
Interest is normally paid semiannually.
Interest is computed as:
Principal × Stated Rate × Time = Interest

10-13
Types of Bonds

Mortgage Debenture
Bonds Bonds

Convertible Junk
Bonds Bonds

10-14
End of Chapter 10

10-15