Accounting: Liabilities and Double Entry Systems

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

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.