Questions and Answers
Define liabilities.
Liabilities are defined as debts or obligations arising from past transactions or events.
Which of the following sources finance the acquisition of assets? (Select all that apply)
Accounts payable are short-term obligations to suppliers for purchases of ____ and to others for goods and services.
merchandise
Accruals represent current assets, while prepayments represent current liabilities.
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Match the following types of shares with their descriptions:
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Study Notes
Liabilities
- Defined as debts or obligations arising from past transactions or events
- Classified into short-term liabilities (maturity ≤ 1 year) and long-term liabilities (maturity > 1 year)
- Examples: Accounts Payable, Accrued Expenses, Prepaid Revenue
Accounts Payable
- Short-term obligations to suppliers for purchases of merchandise and services
- Recorded as a current liability
- Examples: Office supplies, inventory invoices, shipping charges, utility bills
Recording Accounts Payable Transactions
- Creditor's account is debited and credited
- Records credit purchases, returns, payments to creditors, and cash discounts received
- Debt should be paid within 90 days, but can be within a year
Payroll Liabilities
- Employers incur expenses and liabilities from having employees
- Examples: Gross Pay, Net Pay, KWSP, SOCSO, Income Tax, Voluntary Deductions
Accruals and Prepayments
- Accrued Expenses: current liability for unpaid expenses
- Prepaid Income: current asset for prepaid income
- Prepaid Expenses: current asset for prepaid expenses
Recording Accrual and Prepayment Expenses
- Example: telephone bill received and payment
- Ledger entries show debit and credit for Tel. Bills, Tel Bill Accrued, and Tel Bill Prepaid
Long-Term Debt
- Relatively small debt needs can be filled from single sources (banks, insurance companies, pension plans)
- Examples: Installment Long-Term Debt, Lease Payment Obligations
Installment Long-Term Debt
- Long-term notes with a series of installment payments
- Each payment covers interest and a portion of the principal
- Calculating interest on outstanding loan involves identifying unpaid principal balance, interest rate, and installment payment
Lease Payment Obligations
- Operating Leases: lessor retains risks and benefits associated with ownership
- Capital Leases: lease agreement transfers risks and benefits associated with ownership to lessee
- Capital Lease Criteria: transfer of ownership, bargain purchase option, lease term, and present value of minimum lease payments
Financial Leverage
- Borrowing at one rate and investing at a higher rate to generate profit
- Example: borrowing RM1,000,000 at 8% and investing at 10% generates RM20,000 profit
Equity
- Capital or Paid-in Capital for sole proprietorship or partnership
- Treatment in A/C: bring in assets into the company as capital
- Ledger entries show debit and credit for assets and capital A/C
Capital
- For corporate: shares issued to selected people (SDN BHD) or public (BHD)
- No maturity date, may be redeemed
- Types of shares: Ordinary Shares, Preference Shares, Treasury Shares
Drawings
- Taking goods or cash for personal use
- Must be recorded to curb misuse of power
- Treatment in A/C: debit drawings and credit cash/purchases
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Description
This quiz covers the principles of accounting, focusing on liabilities, debt, and equity in the context of double entry systems. It explains the nature of liabilities, short-term and long-term liabilities, and the distinction between debt and equity.