Topic 7

ACCOUNTING FOR LIABILITY AND OWNERS EQUITY

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1. Current Liability
An obligation that needs to be settled within one year. Creditors An amount owed to the supplier, for stock purchased. Unearned Revenue Cash received and recorded before the services being performed or stock delivered. Accrued Expense An expense charged but still unpaid or recorded at the period in which the financial statement is prepared.
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2. Long Term Liability An obligation that need to be settled in a period of more than one year. Example: Long-term loan, Bond and Mortgage. Issuing Procedure: number of bond to be authorized total face value: amount of principal the issuer must pay at the maturity date. contractual interest rate: the interest paid by the borrower and the investor received.
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How do we account or record the Long-term Loan? Example: On 1 Jan 2007, Truth Company issued a 1,000 unit of bond for 10 years at RM1,000 (9% interest) at 100% face value. i. To record the principal 1 Jan 2007: Dr. Cash 1,000,000 Cr. Bond Payable 1,000,000 (To record sale of bond at face value)

ii. To record the interest payable. Assume the interest is paid twice a year i.e. 1 January and 1 July 2007. 1,000,000 x 9% x 6/12 = RM45,000. 1 July 2007 Dr. Interest expense 45,000 Cr. Cash 45,000 (To record payment of bond interest)
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Adjusting Entry: 31 December 2007 Dr. Interest expense 45,000 Cr. Interest payable 45,000 (To record interest payable) When the interest is paid on 1 Jan 2008 Dr. Interest payable 45,000 Cr. Cash 45,000 At the Year 10:(maturity date) Dr. Bond payable 1,000,000 Cr. Cash

1,000,000
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LOANS PAYABLE BY INSTALMENT

Entities may borrow money from a single borrower in the form of loan. It is common for such loans to be repayable by instalment, e.g. mortgages. A mortgage is a loan secured by a charge over property. If the borrower is unable to repay the loan, the lender may sell the property and use the proceeds to repay the loan.
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Accounting for Loans Payable by Instalment

Mortgage payments consist of:
Interest expense and Reduction of loan liability

Journal entry to record mortgage payment

Mar 31 Interest Expense 1 000 Loan Payable 9 000 Cash at Bank 10 000 (To record loan repayment 8 for March)

Components of Long-Term Debt

Entities often have a portion of long-term debt that falls due within the coming year. This portion of the long-term debt should be classified as a current liability. The remainder will be classified as a noncurrent liability. An adjusting entry is not necessary to recognise the current portion of the liability. It is recognised by proper classification on the balance sheet. 9

Owners Equity
Definition: The ownership claims towards the asset owned by the business. Factors affecting the owners equity: Additional capital: increased the amount of owners equity. Drawing: reduced the amount of owners equity Profit and Loss: Profit increase the owners equity Loss decrease the owners equity
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