ACG2021 Chapter 11 (Principles of Financial Accounting)

1. They occur because of a past transaction or event.

2. They create a present obligation for future payment of cash or services.

3. They are an unavoidable obligation.

Current Liabilities must be paid within one year or within the entity’s operating cycle if the cycle is longer than a year.

ex)
Accounts Payable, Notes Payable due within one year, Salaries Payable, Interest Payable, Income Tax Payable and Unearned Revenue

Long-term Liabilities are liabilities that do not need to be paid within one year or within the entity’s operation cycle, whichever is longer.

ex)
Notes Payable

1) Although Sales taxes are the responsibility of the retailer to pay, the retailer passes this cost onto the consumer.

The amount of the principal that is payable within one year of the balance sheet date (Dec 31)


So, if you borrowed \$20,000 for 4 years, and gave \$5,000 each year, that \$5,000 you will give this year would be classified as a current liability. The other \$15,000 would be classified as a long-term liability.

“Businesses pay employees at a base rate for a set period—called straight time. For additional hours—overtime—the employee may get a higher pay rate”

Gross Pay: The total amount of salary, wages, commission, bonuses and any other compensation earned deductions (Taxes would be included as a deduction)

Net Pay: Gross Pay minus deductions.

1) Required Deductions: Deductions that are required by federal, state or local laws. (ex, state income tax)

2) Optional Deductions: “including insurance premiums, retirement plan contributions, charitable contributions, and other amounts that are withheld at the employee’s request.”

The federal act that created social security tax.

Two parts

1. OASDI: Provides benefits based on old age, survivors, and disability insurance

2. Medicare: healthcare for people that are old or disabled

A schedule that summarizes the earnings, withholdings, and net pay for each employee.

Employers must pay three payroll taxes. These taxes are not withheld from employees gross earnings but instead paid by the employer.


1. Employer FICA tax (OASDI & Medicare)

2. State unemployment compensation tax (SUTA)

3. Federal unemployment compensation tax (FUTA)




*Image shows “How Employer payroll taxes will be calculated”

After the pay roll period ended on December 31st, on January 15th, the company is paying all its payables from the payroll of BOTH employer and employee payroll.

Main two

1. Controls for efficiency: All payroll processing is ideally done by computer processing.

2. Controls to Safeguard: Hiring and firing employees should be separate from accounting and from passing checks. (Someone could “hire” a fictitious person and just keep the checks themselves)

A potential liability that depends on a future event.

ex)
The company gets sued. They may lose the lawsuit, and have to pay 500,000, but the outcome hasn’t been determined.

3 Types
1. Remote
2. Reasonably Possible
3. Probable

Evaluate a business's ability to earn interest. The ratio measures the number of times earnings before interest and taxes can cover interest expense.

The equation is EBIT (earnings before interest & taxes) and interest expense.

Times-interest-earned ratio = (Net Income + Income Tax expense + Interest expense) / Interest Expense

Liabilities!