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Topic 7

Topic 7. Accounting for Liabilities and Equities PowerPoint presentation by AFSH University Putra Malaysia. Learning Objectives. Explain the difference between current and non-current liabilities. Identify common types of current liabilities and explain how to account for them.

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Topic 7

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  1. Topic 7 Accounting for Liabilities and Equities PowerPoint presentation by AFSH University Putra Malaysia

  2. Learning Objectives • Explain the difference between current and non-current liabilities. • Identify common types of current liabilities and explain how to account for them. • Identify common types of non-current liabilities, such as debentures and unsecured notes, and explain how to account for them.

  3. Learning Objectives (cont’d) • Prepare the journal entries for loans payable by instalment and distinguish between current and non-current components of long-term debt.

  4. Current Liabilities • A current liability is an obligation that can reasonably be expected to be paid within one year or within the operating cycle, whichever is the longer. • Liabilities that do not meet this definition are classified as non-current. • Examples include: • notes payable • accounts payable • revenue received in advance • accrued liabilities

  5. Notes Payable • Notes payable record obligations in the form of written notes. • Usually require borrower to pay interest or borrowing costs. • Frequently issued to meet short-term financing needs. • Issued for varying periods of time.

  6. Notes Payable (cont’d) • Journal entry when note issued • Journal entry to record interest Mar 1 Cash 100 000 Notes Payable 100 000 (To record issue of 12%, 4-month note to West State Bank) Mar 1 Interest Expense 4 000 Interest Payable 4 000 (To accrue interest for 4 months on West State Bank note)

  7. Notes Payable (cont’d) • Journal entry to settle liabilities Mar 1 Notes Payable 100 000 Interest Payable 4 000 Cash 104 000 (To record payment of West State Bank interest-bearing note and accrued interest at maturity)

  8. Payroll Payable • Employers deduct amounts from employees’ wages and salaries if they are required to be paid to other parties. • These include deductions for: • EPF (KWSP) • Trade union fees • Health insurance • Employers are responsible to remit these withheld funds to the appropriate parties.

  9. Payroll and Payroll Deductions Payable (cont’d) • Entry for payroll accrual and payment Mar 7 Salaries and Wages Expense 100 000 EPF Payable 32 036 Salaries and Wages Payable 67 964 (To record payroll and withheld EPF for the week ending 7 March) Mar 7 Salaries and Wages Payable 67 964 Cash 67 964 (To record payment of 7 March payroll)

  10. Payroll and Payroll Deductions Payable (cont’d) • Journal entry when payments are made Apr 6 EPF Payable 32 036 Cash 32 036 (To record payment of withheld EPF for March)

  11. Revenues Received in Advance • Occurs when customers pay ahead of time for goods or services. • e.g. Purchase of plane tickets Magazine subscriptions Season passes to sporting events

  12. Revenues Received in Advance (cont’d) • Journal entry to record revenue received in advance • Journal entry when service is delivered Aug 6 Cash 500 000 Ticket Revenue Received in Advance 500 000 (To record sale of 10 000 season tickets) Sep 5 Ticket Revenue Received in Advance 100 000 Football Ticket Revenue 100 000 (To record football ticket revenue)

  13. NON-CURRENT LIABILITIES • Obligations expected to be paid after 1 year or outside normal operating cycle. • Common forms of these obligations are: • Bank loans • Long-term notes • Debentures are notes that are subject to a secured charge on the issuers assets. • Unsecured notes are not subject to a security over assets.

  14. Accounting for the Issue of Long-Term Notes(cont’d) • Journal entry to record debentures issued • Journal entry to record payment of interest Jun 30 Cash 1 000 000 Debentures Payable 1 000 000 (To record issue of debentures at face value) Dec 31 Interest Expense (Borrowing Costs) 50 000 Cash 50 000 (To record payment of debenture interest)

  15. Accounting for the Redemption of Long-Term Notes • Notes are redeemed when they are purchased (repaid) by the issuing company. • Carrying amount of the notes will always equal their face value. • Entry to record redemption at maturity 2016 Jun 30 Debentures Payable 1 000 000 Cash 1 000 000 (To record redemption of debentures at maturity)

  16. 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.

  17. 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 for March)

  18. Accounting for Equities • Owner’s equity is owner’s rights over the business’s assets • It is the excess of assets over liabilities • For sole trader entity, the factors that could affect owner’s equity are: • additional capital • drawings by owners • profit or loss for the period

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