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Slide 10.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 10 Current liabilities.

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Presentation on theme: "Slide 10.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 10 Current liabilities."— Presentation transcript:

1 Slide 10.1 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 10 Current liabilities

2 Slide 10.2 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Definitions A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. A current liability is a liability, which satisfies any of the following criteria: (a) it is expected to be settled in the entity’s normal operating cycle; (b) it is held primarily for the purpose of being traded; (c) it is due to be settled within 12 months after the financial statement date.

3 Slide 10.3 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Examples Bank finance. Trade payables (creditors) (suppliers). Unpaid expenses (‘accruals’). Taxation.

4 Slide 10.4 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Examples (Continued) Bank finance – Overdraft, repayable on demand. Trade payables (creditors) – Usually set conditions for repayment, for example, within 30 days or 60 days. May charge interest on overdue amounts. Problem of large organisations delaying payment to small suppliers. Companies are required to explain their policy in paying suppliers who have given credit.

5 Slide 10.5 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Examples (Continued) 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 give current liability. Some tax payments can be delayed for a longer time – called ‘deferred taxation’.

6 Slide 10.6 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Recognition Recognise if: (a) item meets the definition of a liability; (b) there is sufficient evidence that the liability has been created; and (c) that the item has a cost or value that can be measured with sufficient reliability.

7 Slide 10.7 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Recognition (Continued) Risk of understatement (see chapter 4 on prudence) Understatement of liabilities will result in overstatement of the ownership interest.

8 Slide 10.8 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Contingent liabilities Obligations that are contingent upon (depend upon) some future event happening. Examples are: Continuing legal proceedings against the company, for example, product failure Guarantees to bank on behalf of third party borrowing Possible taxation penalties from a specific transaction undertaken.

9 Slide 10.9 Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Recording expenses Matching concept: Match all expenses of the period against revenue, whether paid in cash or not. Accruals concept: Record all known liabilities at the date of the financial statements.

10 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Accrual of expenses A company starts business on 1 January Year 1. It has a financial year end of 31 December Year 1. During Year 1 it receives four accounts for electricity, all of which are paid ten days after receiving them. The dates of receiving and paying the accounts are as follows:

11 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Date invoice receivedAmount of invoiceDate paid £ 31 Mar. Year Apr. Year 1 30 Jun. Year Jul. Year 1 30 Sept. Year Oct. Year 1 31 Dec. Year Jan. Year 2 1,150 Accrual of expenses (Continued)

12 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 ASSETLIABILITYOWNERSHIP INTEREST: PROFIT DateTransactions with Electricity company CashElectricity company Electricity expense Year 1£££ Mar 31Invoice received £350350(350) Apr 10Pay electricity company £350(350) Jun 30Invoice received £180180(180) Jul 10Pay electricity company £180(180) Sep 30Invoice received £280280(280) Oct 10Pay electricity company £280(280) Dec 31Invoice received £340340(340) Totals(810)340(1,150) Analysis of transaction Table 10.1 Spreadsheet analysis of transactions relating to the expense of electricity consumed, Year 1

13 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Summary of spreadsheet – £1,150+ £340– £810 Ownership interest=Liability–Asset 

14 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 (340) 340 Accrual for three months Dec 31 Electricity expense Electricity company CashTransactionsDate OWNERSHIP INTEREST: PROFIT LIABILITYASSET What 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. Spreadsheet entry for accrual Summary of spreadsheet (Continued) Table 10.2 Spreadsheet entry for accrual at the end of the month

15 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 Chapter 10 Bookkeeping supplement

16 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 DEBIT ENTRIESCREDIT ENTRIES Left-hand side of the equation AssetIncreaseDecrease Right-hand side of the equation LiabilityDecreaseIncrease Ownership interestExpenseRevenue Capital withdrawnCapital contributed

17 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 L1 Expense (electricity) PARTICULARSPDRCRBAL Year 1£££ Mar 31Invoice from supplierL2350 Jun 30Invoice from supplierL Sep 30Invoice from supplierL Dec 31Estimated accrualL33401,150 Dec 31Transfer to profit and loss account L5(1,150)nil Analysis of debit and credit

18 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 L2 Liability to supplier PARTICULARSPDRCRBAL Year 1£££ Mar. 31Invoice for electricity expense L1350(350) Apr. 10Cash paidL4350nil June 30Invoice for electricity expense L1180(180) July 10Cash paidL4180nil Sept. 30Invoice for electricity expense L1280(280) Oct. 10Cash paidL4280nil Analysis of debit and credit (Continued)

19 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 L3 Accrual PARTICULARSPDRCRBAL Year 1£££ Dec 31Estimate of electricity expense L1340(340) Analysis of debit and credit (Continued)

20 Slide Pauline Weetman, Financial and Management Accounting, 5 th edition © Pearson Education 2011 TransactionDebitCredit Year 2 Jan. 4Receive invoice for electricity £340 AccrualLiability to supplier What happens when the invoice arrives? It creates a liability to the supplier and cancels the ‘accrual’ previously recorded. Analysis of debit and credit (Continued)


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