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Accounting Principles

            PRINCIPLES of ACCOUNTING II (AC202) ___________ CHAPTER 12 CURRENT AND LONG-TERM LIABILITIES LIABILITIES DEFINED: A probable future payment of assets or services a company is presently obligated to make as a result of past transactions or events. Fundamentally liabilities are measured by the "cost principle" however: Liabilities are comprised of known obligations of a definite amount and known obligations of an estimated amount (i.e. warranties) CURRENT LIABILITIES: Obligations expected to be paid using current assets or by creating other current liabilities LONG-TERM LIABILITIES: Obligations not expected to be paid within one year. Includes long-term notes payable; mortgages payable; warranty liabilities; lease liabilities; and bonds payable. MEASUREMENT OF LIABILITIES Conceptually, the dollar amount of a liability, at any point in time, is the "present value" of the future outlays of assets required to pay the debt in full. i.e. the present value of principal plus all future interest payments The present value amount may be called the "current cash equivalent amount" -What both parties would settle for today! A liability that requires the "going rate of interest" will always have a present value equal to its maturity amount (i.e. interest bearing notes) When the required rate of interest is different from the going rate, or interest is unspecified, the present value will be different from the maturity amount. (i.e. bonds sold at a premium or discount) As such liabilities approach maturity, the current cash equivalent amount approaches the maturity amount CURRENT LIABILITIES Accounts Payable Short-term Notes Payable Unearned (deferred) Revenues Payroll Liabilities -Employee Payroll Deductions -Employer Payroll Taxes Warranty Liabilities Employee Health/Pension Benefits Payable Vacation Pay (employee benefits) Tax Liabilities for Businesses (Federal Income Tax - Corporation only; State and/or local income taxes - Corporation only; property taxes; sales taxes; etc.


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