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    Accounting II Essentials
    Accounting II Essentials
    Accounting II Essentials
    Ebook150 pages2 hours

    Accounting II Essentials

    By Duane Milano

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    About this ebook

    REA’s Essentials provide quick and easy access to critical information in a variety of different fields, ranging from the most basic to the most advanced. As its name implies, these concise, comprehensive study guides summarize the essentials of the field covered. Essentials are helpful when preparing for exams, doing homework and will remain a lasting reference source for students, teachers, and professionals. Accounting II includes current liabilities, long-term liabilities, bonds, partnerships, corporations, earnings and dividends, consolidations, statement of cash flows, and financial statement analysis.
    LanguageEnglish
    PublisherResearch & Education Association
    Release dateJan 1, 2013
    ISBN9780738671369
    Accounting II Essentials

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    Accounting II Essentials - Duane Milano

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    CHAPTER 13

    CURRENT LIABILITIES

    13.1 CURRENT LIABILITIES DEFINED

    Current liabilities are those obligations which must be paid within one year. This includes the portion of long-term debt that is due and payable within one year. Common types of current liabilities include accounts payable, notes payable, accrued liabilities for wages or interest as well as estimated liabilities such as income taxes.

    13.2 ACCOUNTS PAYABLE

    Accounts payable arise when a business purchases inventory or equipment on a credit basis. An example of the journal entry to reflect the purchase of inventory on credit is shown in Example 13.2.1.

    EXAMPLE 13.2.1

    The Sample Company

    General Journal

    The use of the purchases account is limited strictly to purchases of Inventory on credit. Purchases of other items would be reflected as affecting those accounts directly. As an example, if equipment were purchased on account, the journal entry to reflect that is shown in Example 13.2.2.

    EXAMPLE 13.2.2

    The Sample Company

    General Journal

    Payment of those payables are recorded as a debit to accounts payable and a credit to cash as shown in Example 13.2.3.

    EXAMPLE 13.2.3

    The Sample Company

    General Journal

    13.3 NOTES PAYABLE

    Notes payable occur when a business borrows money. Business transactions such as the purchase of real estate or equipment, as well as a temporary need for additional working capital, may necessitate such borrowings. As an example, assume that on March 15, 1999, Smith Corporation borrows $100,000 from its bank for 90 days. Interest is payable at maturity and accrues as a rate of 12%. The journal entry to record this transaction is shown in Example 13.3.1.

    EXAMPLE 13.3.1

    The Sample Company

    General Journal

    On June 15, 1999, Smith Corporation repaid the loan plus $3,000 interest ($100,000 × 12% × 90/360). In this instance, a 360-day year is used for interest calculation. The journal entry to record this transaction is shown in Example 13.3.2.

    EXAMPLE 13.3.2

    The Sample Company

    General Journal

    13.4 LIABILITY FOR SALARIES AND WAGES

    Employees are rarely paid on a daily basis. Instead, a business accrues liability for payroll between pay dates (usually bi-weekly). The gross amount of wages is relatively easy to calculate, consisting of hours worked multiplied by the hourly wage. Salaries are paid bi-weekly or monthly based on some present annual amount. Employers are also responsible for withholding a portion of gross pay for social security (FICA) and Federal income taxes. In addition, the employer may withhold State and municipal income taxes (if applicable). Example 13.4.1 reflects the journal entry necessary to record payroll expense and liabilities as of January 15, 1999 (the end of the payroll period).

    EXAMPLE 13.4.1

    The Sample Company

    General Journal

    In this example, although the business has incurred $15,000 in total salary and wages expenses, only $11,450 is actually paid out to employees. The remainder will be submitted to the appropriate government agency at regular intervals. Other withholdings, such as union dues, would be handled similarly.

    At the same time, an employer incurs liabilities for certain payroll taxes. These include FICA tax (figured at the same rate and on the same amount of earnings as the employees), Federal unemployment tax, and State unemployment tax. The journal entry to record the employer’s tax expense and liabilities is reflected in Example 13.4.2.

    EXAMPLE 13.4.2

    The Sample Company

    General Journal

    13.5 WARRANTIES

    A business may have liabilities that, while quite real, can only be estimated. A company which sells appliances with warranties can incur this kind of liability. In such situations, the company guarantees free repair within a specified period of time in the event of a problem with their product.

    The estimate of the probable expense of such repairs may be based on prior experience. In such a case, the liability for warranties might be a percentage of total sales in a given period. For example, assume the Sample Company sells 200 refrigerators in 1992 with one year warranties. Based on past experience, the company expects 5% of its refrigerators to be

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