Accounting: Liabilities and Double Entry Systems

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)

Debt (correct)

Savings

Equity (correct)

Personal loans

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.

<p>False</p> Signup and view all the answers

Match the following types of shares with their descriptions:

<p>Ordinary Shares = Standard equity ownership in a company Preference Shares = Shares with fixed dividend payments Cumulative Preference Shares = Shares with unpaid dividends carried forward Treasury Shares = Shares reacquired by the issuing company</p> Signup and view all the answers

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

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.