ACCT10002 Lecture Notes - Lecture 7: Accounts Payable, Annual Leave, Promissory Note
Introduction to Financial Accounting Wk. 7
CHAPTER 9: REPORTING AND ANALYSING LIABILITIES
Current liability: an obligation that can reasonably be expected to be paid within 1 year or
within the operating cycle
Legal obligation: an obligation that derives from:
• A contract( through explicit/implicit terms)
• Legislation, or
• Other law
Notes payable: obligations in the form of written promissory notes
• When purchasing inventory on credit, notes payable sometimes used instead of
accounts payable because they give lender written documentation of obligation in
case legal avenues are needed to collect the dent
• Usually require borrower to pay interest and frequently issued to meet short-term
financing needs
Interest: a cost of borrowing money
• Also called borrowing costs or finance costs
Face value: principal payable at maturity
Eg.
Cash DR
Notes Payable CR
Notes Payable
Interest Payable
Cash
Payroll and Payroll Deductions Payable
• Employers incur liabilities relating to salaries and wages
• Employer deducts amounts from employees wages:
o if required to deduct tax from gross pay and pass to ATO
o deductions paid to medical funds/health insurance
o trade units on behalf of employees
• until these deductions, such as pay-as-you-go (PAYG) withheld tax, are remitted to
appropriate parties, they are recorded as increases to appropriate liability accounts
• tax authorities have fines and penalties in employers if taxes aren’t calculated
correctly and paid on time
Salaries and Wages Expense 100 000
Pay-as-you-go withheld tax payable 32 036
Salaries and wages payable 67 964
(to record payroll and withheld taxes for the week ending 7 March)
Salaries and wages payable 67 964
Cash 67 964
(to record payment of taxes for March 7 payroll)
Pay-as-you-go withheld tax payable 32 036
Cash 32 036
(to record payment of withheld taxes remitted to Taxation office for March 7 payroll)
Other payroll deductions
• private health insurance
• superannuation contributions (these are required by law)
o aim is to provide employees with a lump sum and/or regular payments on
retirement
• Union fees
• Charity donations
• Payroll liability accounts are classified as CL; must be paid to employees or remitted
to tax authorities & other parties in short term
Salaries and Wages Expense 37 000
Pay-as-you-go withheld tax payable 32 000
Superannuation payable 4000
Union fees payable 1 00
(to record withheld taxes and deductions for the week ending 7 March)
Employers may also have other costs relating to employees:
• Annual leave
• Workers compensation: an insurance scheme to compensate employees for injuries
or death at work
• Parental leave
• Sick leave
• Long service leave: generally granted after 10 years of service but only accrued after
employees have completed after a number of years of service
o May have CL (for portion to be paid within less than a year) and NCL
component (amount to be paid after one year)
Some are required by law, or specified in salary and wage awards and contracts
• Employees usually entitled to number of paid weeks and annual leave and a number
of days of sick leave
• As employees only become entitled to these benefits pro-rata as they work
throughout the year, employer usually accrues liability at regular intervals
• Workers compensation is usually paid as a yearly premium
Revenues Received in Advance
How entities account for revenues received in advance:
1. When advance is received, cash is increased and CL identifying source of revenue
received in advance is also increased
2. When service is performed, revenue received in advance account is debited and
revenue is increased
Satisfied when 5-step process of revenue recognition is complete
NON-CURRENT LIABILITIES
Non-current liabilities: obligations that are expected to be paid after 1 year or outside
normal operating cycle
• Often bank loans or long-term notes
Public companies may raise debt finance from public in form of:
• Notes issued in small denominations (usually $1000 or multiples of it)
Unsecured notes: notes not subject to a security over assets of the issuing company
Debentures: notes subject to a secured charge over some of the issuer’s assets
“security over assets”: a right to have the assets liquidated to recover unpaid amounts of
debt if the debtor defaults on payment
Convertible notes: notes able to be converted into shares instead of being repaid at
maturity
Why businesses issue unsecured notes or debentures (debt financing)
1. Shareholder control isn’t affected: note holders don’t have voting rights, so current
shareholders retain full control
2. Tax savings result: interest is deductible for tax purposes; dividends aren’t
3. Earnings per share may be higher: although interest expense reduces profit, EPS
often higher with debt financing because no additional shares are issued
Disadvantage to debt financing
• Company locks in fixed payments that must be made in good times and bad
• Interest must be paid on a periodic basis
• Principal (face value) of notes must be paid at maturity
• Of profit target not achieve, ROE can be low/negative
Company with fluctuating earnings and weak cash position may have trouble paying interest
in periods of low earnings. Might lead to bankruptcy
With equity: company can decide low or no dividends during times of low earnings
DETERMINING MARKET VALUE OF UNSECURED NOTES AND DEBENTURES
Issue price: amount paid for note by investor/lender at time of issue
Market value: price at which note is traded by willing parties
Contract interest rate: rate used to determine the amount of interest the borrower pays
and investor receives
• Usually stated as an annual interest rate
• Interest usually paid half yearly
Market value may differ from face value of note
Present value: equivalent value today
Market interest rate: the rate investors demand for lending funds to the entity
Discounting: the process of finding the present value
Document Summary
Current liability: an obligation that can reasonably be expected to be paid within 1 year or within the operating cycle. Legal obligation: an obligation that derives from: a contract( through explicit/implicit terms, legislation, or, other law. Interest: a cost of borrowing money: also called borrowing costs or finance costs. Salaries and wages payable (to record payment of taxes for march 7 payroll) Salaries and wages payable (to record payroll and withheld taxes for the week ending 7 march) Pay-as-you-go withheld tax payable (to record payment of withheld taxes remitted to taxation office for march 7 payroll) Union fees payable (to record withheld taxes and deductions for the week ending 7 march) Employers may also have other costs relating to employees: Satisfied when 5-step process of revenue recognition is complete. Non-current liabilities: obligations that are expected to be paid after 1 year or outside normal operating cycle: often bank loans or long-term notes.
