LIABILITIES

Group 2
Andres, Alcoseba, Siady, Tallo, Enriquez, Balanzar,

01/26/2024 1
A liability is something that an individual or a company owes to
somebody else, usually a sum of money

These are settled over time through the transfer of either money,
goods, or services

LIABILITIES
In the context of a business, liabilities are building blocks of a
company’s finances, often used to fund operations and
expansions.

There are two kinds: Current Liabilities and Non-current

Liabilities
CURRENT
LIABILITIES
 These liabilities are short-term
financial obligations that a
company must pay within a
normal operating cycle, usually
less than 12 months (within a year)

 In simple terms, these are a

company’s pressing debts and
obligations
 Accounts Notes
Payable Payable

Under this kind

Deferred or
of liability, Interest
Unearned
there are six Payable
Income
examples:
Accrued
Taxes Payable
Expenses
Accounts payable The sum of all
(AP) are amounts outstanding The increase or
Account Payables
due to vendors or amounts owed to decrease in total
appear on a
suppliers for vendors is shown AP from the prior
company's
goods or services as the accounts period appears on
balance sheet as a
received that payable balance the cash flow
current liability.
have not yet been on the company's statement.
paid for. balance sheet.

1.) Accounts Payable

Examples of Accounts Payable Expenses
Supplier Invoices

Situation: A tech company orders computer components from a supplier for manufacturing its products. The
supplier delivers the components along with an invoice for $20,000, with payment terms of net 30 days.

Application: The company records an accounts payable of $20,000 to acknowledge the liability for the
components received. This allows them to track their outstanding payment obligation and manage their cash
flow effectively.

Raw Materials and Inventory:

Situation: An automobile manufacturing company purchases steel and rubber on credit from a raw material
supplier, incurring a total cost of $50,000 for the materials used in production.

Application: The company records an accounts payable of $50,000 to recognize its obligation to pay for the raw
materials. This helps in managing inventory costs and tracking the timing of payments.

Rent and Leases :

Situation: A restaurant rents a commercial space in a shopping center for $5,000 per month, and the rent is due
on the 5th of each month.

Application: The restaurant records an accounts payable of $5,000 each month until the rent is paid, ensuring
that the rent expense is recognized in the correct accounting period.
 In each of these situations, accounts
payable are applied to record and
manage the company’s short-term
liabilities for goods received, services
rendered, or expenses incurred on
credit. It helps businesses maintain
accurate financial records, plan
for future payments, and see to it that
they meet their financial obligations to
suppliers and service providers.
 NOTES PAYABLE IS A LIABILITY ACCOUNT IN
WHICH A BORROWER RECORDS A WRITTEN
PROMISE TO REPAY A LENDER.

2.) Notes IN SIMPLER TERMS, A NOTE PAYABLE IS A LOAN

Payable BETWEEN TWO PARTIES.

IT CAN EITHER BE SHORT-TERM OR LONG-TERM,

DEPENDING ON THE TIMING. SHORT-TERM NOTES
PAYABLE ARE DUE WITHIN 12 MONTHS. LONG-
TERM NOTES PAYABLE ARE DUE AFTER A YEAR.
Examples:
 Tina borrows $5,000 from Keisha to secure a down payment for her new
restaurant's mortgage. Tina signs the note as the maker and agrees to make
payments to Keisha every month for $500, along with $50 interest, until she
pays off the note. Tina records the loan amount of $5,000 as a debit to notes
payable and as a credit to the cash account.

One of your friends, Rodrick, is starting a new business, so you loan him
$10,000 as one of his investors. Rodrick signs the note as the maker,
agreeing to repay the loan with monthly payments of $225. The agreement
includes interest payments of $60 alongside each monthly payment. He
records the amount of $10,000 as a debit in notes payable and as a credit to
the cash account.
Interest payable or accrued interest is the amount of interest owed
by the business as of statement of financial position date for
money borrowed on interest bearing promissory notes issued by
the firm. The interest debt also builds up each day.

3.) INTEREST
PAYABLE
Interest payables represents the amount of interest expense that
has accrued to date but has not paid as of the date of the balance
sheet's current liabilities section. In short, it displays the current
amount of interest owing to its lenders (Vipond, 2023).
EXAMPLES

 A business owes $1,000,000 to a lender at a 6% interest rate and pays interest to

the lender every quarter. After one month, the company accrues or accumulates
interest expense of $5,000, which is a debit to the interest expense account and a
credit to the interest payable account. After the second month, the company
records the same entry, bringing the interest payable account balance to $10,000.
After the third month, the company again records this entry, bringing the total
balance in the interest payable account to $15,000. It then pays the interest, which
brings the balance in the interest payable account to zero.
 This usually occurs
because a customer
This refers to the or client has made an
income already advance payment for
collected but not yet services that have not
earned yet been rendered or

3.) Deferred or goods that have not

yet been delivered

Unearned
Income This must be recorded
as a liability because if
Only when goods and
services have been
unable to deliver the delivered can this
goods or services, it is income be considered
expected to have this an asset
available to refund
your clients
 2.)
1.) Rent
Subscription Examples
Payments
Payments
 Income tax payable is typically the tax incurred and due within a year. It is the
amount firms have to pay to the government as part of their earnings. Income tax
payable on a company’s balance sheet falls under the current liabilities portion of
the balance sheet.

Income tax payable is the amount that is due to be paid by businesses to the
government within one year.

4.) Tax The amount levied as tax is usually calculated on gross income. They are subjected
to various deductions as per the laws.

Payable
Income tax payable on the balance sheet is considered a current liability and not
long-term liability as it is due to be paid within a year.

Paying income tax has several advantages, including avoiding penalties,

safeguarding credit scores, making it easier to apply for financial help, increasing
social security payments, etc.
 The rent of a place is $6,000 per month, and the tax rate prevailing in the area is 35%.

Therefore, in the income statement for 2022, the owner includes the following
details: The revenue for the year will be $72000; the expenses will be $21,000; the pre-
tax income will be $51000 (72000-21000); the tax rate will be 35%, and the income tax
expense will be $17850 (51000*35/100). We are now about to do the taxable income
calculation.

EXAMPLES If there is an additional month of rent revenue in 2023, it will be included as it is.
Therefore, the sum of 72000 and 6000 will be 78000. The expense remains at
21,000.Therefore, the taxable income becomes more than 57,000 (51,000+6000),
calculated with the same tax rate of 35%.

The tax payable will be thus $19,950.

5.) Accrued Expenses
 Accrued expenses refer to an
expense that a company has incurred
but not paid for. It is recorded and
taken note of as a liability because it Common examples include:
represents the company’s obligation
to pay for a commodity or service
that they have received.

Accrued
Expenses
Salary- If an employee works during Utility expenses- Utilities like
the current accounting period but electricity and water are used and
won’t receive a salary until the next usually paid at the end of the month;
period, their salary will be recorded the utility bill is yet to be paid and is
as an accrued expense. in turn an accrued expense.
NON-CURRENT
LIABILITIES/ LONG-
TERM LIABILITIES
 These liabilities are long-term
financial obligations of a company
and they are due beyond twelve
months (more than a year)
 They are an important part of a
cash flow forecast. By comparing
non-current liabilities to cash flow,
a business can see whether it has
the ability to pay its future debts
and grow.
NOTES PAYABLE LONG INSTALLMENT MORTGAGE PAYABLE BONDS PAYABLE
TERM CONTRACTS PAYABLE

Under this kind of liability, there are

four examples:
 These are amounts on signed formal notes due after one year
from the date of the statement of financial position

1.) Notes
To be categorized as a long-term note payable, the maturity of
Payable Long the note must be longer than one year or operating cycle
Term

These are similar to bonds, since they both carry a stated or

implied rate of interest and have a known maturity date but in
this case long-term notes are not issued to the public and traded
 Examples:
Accounting for long-term notes payable is
similar to accounting for short-term interest-
bearing notes payable except the term is
longer than one year. They both are based on
installment payments. The terms require the
borrower to make equal installment
payments over the term of the loan. One
example would be a three-year loan obtained
from a bank. This would be classified as a
long-term note payable.
 01
2.)
Installment Contracts Payable refers to a type of financial
Installment liability incurred when a company enters into a contractual
agreement to make payments in installments over a specified
Contracts period of time. It represents the amount owed by the
company for goods or services received under an installment
Payable payment plan. installment contracts make it possible for
individuals and businesses to acquire assets or services
immediately while spreading the cost over a period of time,
making it more manageable for their budgets.
Auto Loans: When you Mortgages: Home Student Loans: Many Personal Loans: When Appliance or Furniture Credit Card Minimum Retail Store Financing:
finance the purchase mortgages are students use you borrow money Financing: Some Payments: While credit Some retail stores
of a car, you often sign typically structured as installment contracts from a bank or lender people finance the cards are typically offer installment
an installment contract installment contracts. to pay for their for personal expenses, purchase of revolving credit, they contracts for large
where you agree to You make regular education. They make it's often done through appliances, furniture, often have a minimum purchases. For
make monthly monthly payments to monthly payments to an installment or electronics through monthly payment example, buying a
payments until the gradually pay off the repay the loan amount contract, where you installment contracts. requirement. This can high-end smartphone
loan is paid off. loan over the agreed- borrowed for tuition make regular They make monthly be seen as a form of an on an installment plan
upon term, often 15 or and expenses. payments until the payments until the installment contract if where you make
30 years. loan is satisfied. item is paid off. you carry a balance monthly payments.
and make monthly
payments.

EXAMPLES:
3.) MORTGAGE PAYABLE
 is the liability of a property owner to pay a loan that is secured by
property. From the perspective of the borrower, the mortgage is
considered a long-term liability. Any portion of the debt that is payable
within the next 12 months is classified as a short-term liability. The total
amount due is the remaining unpaid principal on the loan.
Examples :
The Stats Man takes out a 15-year mortgage of $175,000 with a 7.5% interest rate and monthly payments of $1,622.28. Here's a simplified
breakdown of what happens:

A. Getting the mortgage

• The Stats Man borrows $175,000 from a lender.
• The lender records an increase (debit) to cash (money received) and an increase (credit) to the mortgage payable (the loan he owes).

B. Making Monthly Payments:

• Each month, The Stats Man makes a payment of $1,622.28.
• Part of this payment goes towards reducing the loan amount (principal), and the rest covers the interest on the loan.

C. Interest calculation
• The interest portion of the first payment is $1,093.75, calculated as 7.5% annual interest on the remaining $175,000 loan balance, divided by
12 (for monthly payments).
• The interest portion of the second payment is $1,090.45. This changes because the loan balance has decreased after the first payment.

D. Principal Reduction
• After the first payment, the outstanding loan balance is reduced by $528.53. This is the difference between the total payment of $1,622.28
and the interest expense of $1,093.75.
• The interest portion for the next payment is calculated using the new loan balance, which is $174,471.47.

E. Continued Reduction and Calculation:

• This process of calculating the interest portion of each payment continues as the loan balance decreases with each payment.
• The principal portion of each payment is what's left after subtracting the interest expense from the total payment.

This cycle repeats until The Stats Man pays off the entire mortgage.
BONDS PAYABLE
• Bonds are an agreement in which the issuer
obtains financing in exchange for promising
to make interest payments in a timely manner
and repay the principal amount to the lender
at the bond’s maturity.
• The issuer of the bonds is contractually
obligated to pay interest expenses periodically
over the borrowing term and repay the
principal amount. Since bonds are financing
instruments that represent a future outflow of
cash—e.g. the interest expense and principal
repayment—bonds payable are considered
liabilities.
REFERENCES:
https://www.investopedia.com/terms/l/liability.asp

https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/current-liabilities

https://www.investopedia.com/terms/a/accountspayable.asp

https://www.mineraltree.com/accounts-payable/

https://www.indeed.com/career-advice/career-development/what-is-notes-payable

https://www.patriotsoftware.com/blog/accounting/notes-payable/

https://corporatefinanceinstitute.com/resources/accounting/interest-payable/

https://www.accountingtools.com/articles/interest-payable#:~:text=Example%20of%20Interest%20Payable,to%20the%20interest%20payable%2
0account
.

http://wallstreetmoio.com

https://www.investopedia.com/ask/answers/031015/whats-difference-between-accrued-expenses-and-accounts-payable.asp#:~:text=Salaries%2C%
20rent%2C%20and%20interest%20are,and%20interest%20payments%20on%20loans

https://nces.ed.gov/pubs2004/h2r2/ch_5_2.asp

https://www.accountingtools.com/articles/mortgage-payable

https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/long-term-liabilities/mortgage-payable

https://www.wallstreetprep.com/knowledge/bonds-payable/