Chapter 11

• Liabilities


  Debts that are owed to creditors
• Liabilitieshave three main characteristics:


  • Occur as a result of a past transaction or event
  • Create a present obligation for future payment of cash or services
  • Are an unavoidable obligation
• Current liabilities

  Must be paid either with cash or with goods and services within one year or within the entity’s operating cycle
• Long-term liabilities


  Do not need to be paid within one year or within the entity’s operating cycle
• Current liabilities


  • Accounts Payable
  • Sales Tax Payable
  • Unearned Revenue
• Long-term liabilities


  • Notes Payable
  • Mortgage Payable
  • Bonds Payable
• Sales tax is not an expense of the business. It is a current liability.
• Companies collect sales tax and then forward it to the state at regular intervals.
• Unearned revenue(Deferred revenue)


  Arises when a business has received cash before providing goods or performing work
• Short-term note payable


  A written promise by a business to pay a debt, usually involving interest, within one year or less
• Businesses occasionally borrow cash from banks.
• Promissory note


  A note stating that the business will pay the principal plus interest at a specified maturity date. It is required by the bank.
• Current portion of long-term notes payable


  Reported as a current liability when a long-term debt is paid in installments
• Payroll, also called employee compensation, creates liabilities for a business.
• For service organizations, payroll is the major expense.
• Ways to label an employee’s pay

  • Salary
  • Compensation
  • Commission
  • Bonus
  • Benefits
• Gross pay


  Total amount of salary, wages, commissions, and bonuses earned by an employee during a pay period
• Net pay


  The amount an employee gets to keep, also called take-home pay
• Required deductions


  • Federal and state income tax
  • Social Security tax
  • Other deductions required by federal, state, or local law
• Optional deductions


  • Insurance premiums
  • Retirement plan contributions
  • Charitable contributions
• The income tax deducted from gross pay is called income tax withholding.
• The amount withheld depends on the employee’s gross pay and the number of withholding allowances claimed.
• Federal Insurance Contributions Act (FICA)


  Also known as the Social Security Act

  Created the Social Security tax
• The law requires employers to withhold Social Security (FICA) tax from employees’ paychecks.
• FICA components


  • OASDI (old age, survivors, and disability insurance)
  • Medicare (medical benefits)
• Some companies withhold payroll deductions and then pay designated organizations according to employee instructions.
• Examples of optional withholding deductions

  • Insurance premiums
  • Retirement savings
  • Union dues
  • Gifts to charities
• Many companies use a payroll register to help summarize the earnings, withholdings, and net pay for each employee.
• Employer payroll taxes


  • Employer FICA tax (OASDI and Medicare)
  • State unemployment compensation tax (SUTA)
  • Federal unemployment compensation tax (FUTA)
• SUTA and FUTA are unemployment compensation taxes paid by employers to the government.
• Controls for payroll


  • Controls for efficiency
  • Controls to safeguard payroll disbursements
• A business may know that a liability exists but not know the exact amount.
• Common examples of estimated liabilities


  • Bonus plans
  • Vacation pay
  • Health and pension expense benefits
  • Warranties
• Businesses typically offer vacation, health, and pension benefits to employees.
• A pension plan provides benefits to retired employees.
• Warranty


  A guarantee that products are free from defects
• The time period of warranties varies by product and company.
• The matching principle requires businesses to record Warranty Expense in the same period that the company records the revenue related to the warranty.
• Contingent liability


  A potential liability that depends on a future event
• For a contingent liability to be paid, some event must happen in the future.