A liability is a of the entity to transfer . as a result of
…
A current liability is a liability that satisfies any of the following criteria:
(a) It is expected to be settled in the entitys .
(b) It is held primarily for the purpose of being .
(c) It is due to be settled within . after the financial year-end date.
B..
T.. (suppliers)
U (accruals)
T
Bank finance: overdraft, repayable .
Trade payables (creditors): Usually set conditions for repayment, for example,
. may charge interest on overdue amounts. The problem is due to
large organisations delaying payment to small suppliers. Companies are required to explain their
policy in paying suppliers who have given credit.
Taxation: Companies pay taxes on profits after the profit is earned. Large companies pay
quarterly, whereas others pay 9 months after the year end. Both cases give a current liability.
Some tax payments can be delayed for a longer time, called ..
Financial Accounting
Risk of understatement (see Chapter 4 on prudence)
Understatement of liabilities will result in .. of the ownership interest.
Contingent liabilities are obligations that are contingent upon (depend upon) some future event
happening. Examples are:
continuing . against the company, for example, product failure;
g.. to bank on behalf of third party borrowing and
possible . penalties from a specific transaction undertaken.
M..: Match all expenses of the period against revenue,
whether paid in cash or not.
A.: Record all known liabilities at the financial year-end date.
A company starts business on 1 January Year 1. It has a financial year end of 31 December
Date invoice received Amount of invoice Date paid
Financial Accounting
Spreadsheet analysis of transactions relating to the expense of electricity
consumed, Year 1
Date Transactions with Electricity
company
Asset Liability Ownership
interest: profit
of the period
Cash Electricity
company
Electricity
expense
Totals
Now consider what might happen if the final electricity invoice for the year has not been
received on 31 December Year 1. If no invoice has been received, then there will be no entry in
the accounting records.
Need to accrue the expense
Spreadsheet entry for accrual at the end of the month
Date Transactions with electricity
company
Asset Liability Ownership
interest: profit
of the period
Cash Electricity
company
Electricity
expense
Financial Accounting
Analysis of debit and credit aspect of each transaction and event
Date Transaction Debit Credit
The amount of the liability to the supplier cannot be recorded until the invoice is received. The
credit entry for the estimate of the amount owing to the supplier is therefore shown in a separate
account called accruals, which will be the basis for the amount shown in the statement of
financial position (balance sheet) under that heading.
L1 Expense (electricity)
Date Particulars Page Debit Credit Balance
Financial Accounting
L2 Liability to supplier
Date Particulars Page Debit Credit Balance
L3 Accrual
Date Particulars Page Debit Credit Balance
What happens when the invoice arrives?
It creates a liability to the supplier and cancels the accrual previously recorded.
Date Transaction Debit Credit