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Liabilities and Equity

Liabilities and Equity. Definition of Liabilities. Liabilities; amount owed which represents a probable future outflow of assets as a result of a past event or transaction. Liabilities are debts or obligations of the business that can be paid with cash, good or services. Classification.

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Liabilities and Equity

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  1. Liabilities and Equity

  2. Definition of Liabilities • Liabilities; amount owed which represents a probable future outflow of assets as a result of a past event or transaction. • Liabilities are debts or obligations of the business that can be paid with cash, good or services.

  3. Classification • Current • Obligations that are to be paid out of current assets and are due within a short time, usually within one year • Long-term • Obligations that are to be paid within more than one year or one accounting period

  4. Types of Current liabilities: • Overdraft – over withdrawal that exceed the amount available in the bank account. • notes payable due for payment within one year of the balance sheet date – • Obligations in the form of written promissory notes • usually require the borrower to pay interest • frequently issued to meet short-term financing needs • accounts payable- • exist when the business buy goods from supplier on credit.

  5. Continues…Current liabilities include: • unearned revenues- Cash received from customers before goods are delivered or services are rendered • accrued expenses such as taxes, wages and interest payable. • a portion of long term-debt comes due in the current year

  6. Short-Term Notes Payable A firm issues a 90-day, 12% note for $1,000, dated August 1, 2004 to Murray Co. for a $1,000 overdue account. Aug. 1 Accounts Payable—Murray Co.1,000 Notes Payable 1,000 When the note matures, the liability is cancelled and the payment, including interest ($1,000 x 12% x 90/360) is recorded. Oct. 30 Notes Payable 1,000 Interest Expense 30 Cash 1,030

  7. LONG TERM LIABILITIES • Types of long term liabilities; • loan, • mortgages payable, • bonds. • long term liabilities will involves: • the repayment of principal • the payment of interest • The interest account must be kept separately from principal account.

  8. Bond • A bond is simply a form of long-term interest-bearing note. It requires periodic interest payments, and the face amount must be repaid at maturity. • Bond can be issue at par, at discount or at premium

  9. Example 1: Bond On January 1, 2004, a corporation issues for cash $100,000 of 12%, five-year bonds, with interest of $6,000 payable semiannually. Jan. 1 Cash 100,000 Bonds Payable 100,000

  10. Every six months after the bonds have been issued, interest payments of $6,000 are made. June 30 Interest Expense 6,000 Cash 6,000 At the maturity date, the payment of the principal of $100,000 is recorded. Dec. 31 Bonds Payable 100,000 Cash 100,000

  11. mortgage payable • Similar to notes payable-written promise to pay a stated amount at one or more specified future dates • Money borrowed is for a specific asset • Generally requires periodic payment of principal plus interest • Payment of principal and interest should be separated for recording purposes using a mortgage amortisation schedule

  12. Example 2: • Syarikat ABC issued a RM500 000, 12%, 20 year mortgage payable on December 1999. The terms provide for semiannual installment payments of RM33 231 on June 30 and December 31. This payment includes payment of interest and principal • Shows the amount to be recorded in balance sheet as at 31 December 2000.

  13. Semiannual Interest Period Cash Payment RM Interest Expense RM 12% Reduction of Principal RM Principal Balance RM Issue Date 500,000 30/6/2000 33,231 30,000 3,231 496,769 31/12/2000 33,231 29,806 3,425 493,344 30/6/2001 33,231 29,601 3,630 489,714 31/12/2001 33,231 29,383 3,848 485,866

  14. Current Maturities of Long-Term Debt Long-term liabilities that mature within the coming year must be classified as current liabilities.

  15. Syarikat ABC Balance Sheet (Extract) As at 31 December 2000 Current Liabilities long term-debt comes due in the current year (RM3 630 + RM3 848) RM7 478 Long Term Liabilities Mortgage Payable (RM493 344 – RM7 478) RM485 866

  16. OWNERS’ EQUITY • The owners’ equity represents the owner’s claim to the assets of the business. Because creditors’ claims have legal priority over those of the owner, owner’s equity is a residual amount. • This means, if you are the owner of the business, you are entitled to assets that are left after the claims of creditors have been satisfied in full. • Therefore, owner’s equity is always total assets less total liabilities

  17. Increases and Decreases In Owner’s Equity Increases In Owner’s Equity •  Investments of cash or other assets by the owner • Earnings from profitable operation Decreases In Owner’s Equity • Withdrawals of cash or other by the owner • Losses from unprofitable operation of the business.

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