ACC 221 Chapter 8: Current Liabilities

Notes Payable

A liability that creates interest expense. When a company borrows money from a bank, it pays the bank interest in return for using the bank's money during the term of the loan. The company reports its liabilities as notes payable

Explain the accounting for other current liabilities

When a company receives cash in advance, it debits Cash and credits Deferred Revenue, a current liability account. When it earns the revenue, the company debits Deferred Revenue and credits Sales Revenue. Sales taxes collected from customers by the seller are not an expense. Instead, they represent current liabilities payable to the government. We report the currently maturing portion of a long-term debt as a current liability in the balance sheet.

When the company collects the sales taxes, it _________ and __________

increases (debits) Cash, increases (credits) Sales Tax Payable

We record interest expense in the period in which we _______, rather than in the period in which we ______.

incur it, pay it

List the payroll costs for employees

- Federal and state income taxes - Employee portion of Social Security and Medicare (FICA taxes) - Employee contributions for health, dental, disability, and life insurance (fringe benefits) - Employee investments in retirement or savings plans (fringe benefits)

List the payroll costs for employers

- Federal and state unemployment taxes - Employer matching portion of Social Security and Medicare (FICA taxes) - Employer contributions for health, dental, disability, and life insurance - Employer contributions to retirement or savings plans

Define liability and its 3 essential characteristics

A present responsibility to sacrifice assets in the future due to a transaction or other event that happened in the past (1) probable future sacrifices of economic benefits (2) arising from present obligations to other entities (3) resulting from past transactions or events

What's the difference between assets and liabilities?

Assets represent probable future benefits. In contrast, liabilities represent probable future sacrifices of benefits (mainly cash. Ex; accounts payable, notes payable and salaries payable)

What're current liabilities and long-term liabilities?

Current liabilities: Most common. Are usually payable within one year Long-term liabilities: Are payable more than one year from now

What's one such liability that requires paying something other than cash?

Deferred revenue: requires giving up inventory or services rather than cash to satisfy the liability

Payroll Liabilities

Employers incur expenses and liabilities from having employees

How is interest for a current note payable calculated?

Interest = Face value x Annual interest rate x Fraction of the year

What obligations do firms most frequently report as current liabilities?

Notes payable, accounts payable, and payroll liabilities are three main categories. In addition, companies report a variety of other current liabilities, including deferred revenue, sales tax payable, and the current portion of long-term debt

What's the general formula for determining sales tax?

Sales tax = Total cash paid - (Total cash paid/1 + Sales tax rate)

Current portion of long-term debt

The amount that will be paid within the next year

Operating cycle

The time it takes to produce revenue

Accounts Payable

aka trade accounts payable, are amounts the company owes to suppliers of merchandise or services that it has bought on credit

Many short-term loans are arranged under an _________ with a bank, or for larger corporations in the form of _________, a loan from one company to another.

existing line of credit, commercial paper