InstructionsCompose an essay that answers the following questions:What are three main characteristics of liabilities, and why is it important to classify liabilities into short-term and long-term? Include examples of short and long-term liabilities in your response.Your essay must be at least one page in length. Be sure to include an introduction that gives the purpose of your essay and engages the reader. You must use at least your textbook as a reference, but you may use other resources as needed. Any information from a resource must be cited and referenced in APA style, and your essay should be formatted in accordance with APA guidelines.
UNIT VIII STUDY GUIDE
Course Learning Outcomes for Unit VIII
Upon completion of this unit, students should be able to:
1. Examine the accounting cycle.
2. Identify business transactions.
3. Generate inventory systems and costing methods.
4. Appraise the classes and transactions of liabilities.
4.1 Describe the three main characteristics of liabilities.
4.2 Explain why it is important to classify liabilities into short and long term.
6. Analyze financial statements to inform decision makers.
8. Compare International Financial Reporting Standards (IFRS) to Generally Accepted Accounting
Unit VIII Essay
Unit VIII Essay
Chapter 11: Current Liabilities and Payroll
Chapter 14: Long-Term Liabilities
BBA 2201, Principles of Accounting I
UNIT x STUDY GUIDE
In the accounting equation, assets = liabilities + equity, we can see that there are two claims to the assets of a
business—creditors and owners. The accounting equation can also be written as: assets – liabilities = equity.
In this equation, we can see that the liabilities of a business require the use of assets to satisfy the amount
A liability is an amount owed to lenders, suppliers, or government agencies and requires the use of assets or
future revenues to satisfy the debt. There are two categories of liabilities —current and long term. A current
liability is the amount owed that must be paid within one year or within the company’s operating cycle,
whichever is longer (Miller-Nobles, Mattison, & Matsumura, 2018).
The most common current liability is accounts payable. An account payable is an amount due a vendor or
supplies for products, supplies or services (Miller-Nobles et al., 2018). Retail businesses will also have sales
tax payable. Sales tax payable is the amount of sales tax collected by the retailer that must be remitted to the
tax agencies (Miller-Nobles et al., 2018). Because the accounts payable and sales tax payable are due within
one year (generally due within 30 days) they are a current liability.
Some businesses will receive cash payments in advance of providing a service, which is referred to as
unearned revenue (or deferred revenue). Many gyms and fitness centers will have deferred revenue. If you
have ever paid for a year’s membership at the beginning of the year to receive a discount, then you were
involved in a transaction with unearned revenue. The gym does not earn the revenue until they have provided
you with the monthly membership.
For example: If you were to purchase a one year membership for $600, the gym would debit cash for $600
and credit unearned revenue for $600 (a liability). As each month passes, and you do not discontinue your
membership, the gym will record revenue on a monthly basis. Each month the gym will record $50 of revenue
($600 divided by 12 months). The gym will debit unearned revenue and credit revenue for $50.
Long-term liabilities are liabilities that will become due beyond one year or beyond the company’s operating
cycle (Miller-Nobles et al., 2018). A mortgage payable, note payable, or bonds payable are examples of longterm liabilities. Generally, most long-term liabilities have a current portion as well.
For example: Let’s say that a company has a 30-year mortgage on their office building. The mortgage is
$500,000, payments are due monthly with an interest rate of 4.0%. The first year’s amortization is below
in Figure 1.
BBA 2201, Principles of Accounting I
In this case, the loan was entered into on January 1, 2015 for $500,000. The company
UNIT x STUDY
liability in the amount of $8,057.94 and a long-term liability in the amount of $491,942.06.
The current liability
portion is shown as a current liability on the balance sheet and listed as “Current portion of long-term debt.”
Also, notice that with each payment being made, the payment amount remains the same but the allocation
between principal and interest changes with each payment. On this particular amortization, the total payments
of $2,387.08 will be $859,348.80 over the course of 30 years. Of this amount, $500,000 is principal and the
remaining $359,348.80 is interest expense. The final exam contains questions and problems related to the
concepts covered in this unit. If you need extra practice working these problems, be sure to review the
examples created by the CSU Math Center in the suggested reading section of this unit.
Miller-Nobles, T., Mattison, B., & Matsumura, E. M. (2018). Horngren’s accounting (12th ed.). Upper Saddle
River, NJ: Pearson.
The CSU Math Center has created sample problems and examples that will
help you to complete the problems on the unit assessment. For more detailed
explanations or to receive a lesson recorded by the Math Center, please contact
a math specialist at firstname.lastname@example.org or submit a math
center request by clicking here.
Click here to access the Unit VIII example worksheet.
Learning Activities (Nongraded)
Nongraded Learning Activities are provided to aid students in their course of study. You do not have to
submit them. If you have questions, contact your instructor for further guidance and information.
For a review of the Key Terms of the unit, click here to access the interactive Unit VIII Flashcards in
PowerPoint form. (Click here to access a PDF version.)
BBA 2201, Principles of Accounting I
Liabilities are debts that are owed to creditors. Liabilities have three main
1. They occur because of a past transaction or event.
2. They create a present obligation for future payment of cash or services.
3. They are an unavoidable obligation.
Liabilities can be split into two main categories: current and long-term. In this chapter,
we discuss current liabilities. Current liabilities must be paid either with cash or with
goods and services within one year or within the entity’s operating cycle if the cycle is
longer than a year.
Accounts Payable, Notes Payable due within one year, Salaries Payable, Interest
Payable, and Unearned Revenue are all current liabilities. Any portion of a long-term
liability that is due within the next year is also reported as a current liability. Current
liabilities are listed on the balance sheet in the order in which they are due.
Long-term liabilities are liabilities that do not need to be paid within one year or within
the entity’s operating cycle, whichever is longer. Many Notes Payable are long-term,
such as a mortgage on a building
Amounts owed for products or services purchased on account are accounts payable.
Because these are typically due in 30 days, they are current liabilities. We have seen
many accounts payable illustrations in preceding chapters. Businesses can record
accounts payable for the purchase of goods or for the receipt of services. Accounts
payable occur because the business receives the goods or services before payment
has been made.
Most states assess sales tax on retail sales. Retailers collect the sales tax in addition to
the price of the item sold. Sales Tax Payable is a current liability because the retailer
must pay the state in less than a year. Sales tax is usually calculated as a percentage of
the amount of the sale. Sales tax is not an expense of the business. It is a current
liability. Companies collect the sales tax and then forward it to the state at regular
intervals. They normally submit it monthly, but they could file it at other intervals,
depending on the state and the amount of the tax. To pay the tax, the company debits
Sales Tax Payable and credits Cash.
Unearned revenue is also called deferred revenue. Unearned revenue arises when a
business has received cash in advance of providing goods or performing work and,
therefore, has an obligation to provide goods or services to the customer in the future.
Unearned revenues are current liabilities until they are earned.
Short-term notes payable are a common form of financing. Short-term notes payable
represent a written promise by the business to pay a debt, usually involving interest,
within one year or less.
Long-term notes payable are typically reported in the long-term liability section of the
balance sheet. If, however, the long-term debt is paid in installments, the business will
report the current portion of notes payable (also called current maturity) as a current
liability. The current portion of notes payable is the principal amount that will be paid
within one year of the balance sheet date. The remaining portion of the note will be
classified as long-term.
1. How are current liabilities of known amounts accounted for?
▪ Current liabilities are liabilities that must be paid with cash or with goods and
services within one year or within the entity’s operating cycle if the cycle is
longer than a year.
▪ Some examples of current liabilities are accounts payable, sales tax payable,
unearned revenues, and short-term notes payable.
▪ Current liabilities also include any current portion of long-term notes payable.
2. How do companies account for and record payroll?
▪ Gross pay is the total amount of salary or wages earned by the employee.
Net pay is the amount that each employee gets to keep (take-home pay).
▪ Payroll withholding deductions are the difference between gross pay and net
pay. Examples of payroll deductions that employees pay include:
▪ Income tax withholding: federal, state, and local income tax
▪ Employee FICA tax (at time of printing):
o OASDI: 6.2% on the first $118,500 of annual earnings
o Medicare: 1.45% on earnings up to $200,000, 2.35% on all earnings
▪ Optional withholdings: charitable contributions, union dues, and so on
▪ A payroll register can be used to help summarize the earnings, withholdings,
and net pay for each employee.
▪ Businesses record a journal entry for payroll and payroll withholdings as a
debit to Salaries and Wages Expense and a credit to various liabilities until
the amounts are paid.
▪ Employers must pay at least three payroll taxes:
▪ Employer FICA tax (at time of printing):
o OASDI: 6.2% on the first $118,500 of each employee’s annual
o Medicare: 1.45% on all earnings
▪ State unemployment compensation tax (SUTA): varies by state; we will
use 5.4% on the first $7,000 of each employee’s annual earnings
▪ Federal unemployment compensation tax (FUTA): 0.6% on the first
$7,000 of each employee’s annual earnings
▪ Payroll taxes are recorded as a debit to Payroll Tax Expense and a credit to
various liabilities until they are paid.
▪ Internal control over payroll involves efficiency and safeguarding of payroll
3. How are current liabilities that must be estimated accounted for?
▪ Bonuses are based on meeting a specific goal and are
considered liabilities (Employee Bonus Payable) until paid.
Vacation, health, and pension benefits must be estimated and recorded
as liabilities until paid.
▪ Warranty Expense (DR) and Estimated Warranty Payable (CR) must be
recorded in the same period that the company records the revenue related to
▪ As warranties are honored, the Estimated Warranty Payable account is
4. How are contingent liabilities accounted for?
▪ A contingent liability is a potential liability that depends on some future event.
▪ Accounting for contingent liabilities is based on the following likelihoods:
▪ Remote: Do not disclose.
▪ Reasonably possible: Describe the situation in a note to the financial
▪ Probable and the amount of the expense or loss cannot be estimated:
Describe the situation in a note to the financial statements.
▪ Probable and the amount of the expense or loss can be estimated: Record
an expense or loss and a liability based on estimated amounts.
5. How do we use the times-interest-earned ratio to evaluate business
▪ The times-interest-earned ratio is calculated
as (Net income+Income tax expense+Interest expense)/Interest expense
(Net income+Income tax expense+Interest expense)/Interest expense.
▪ It measures the number of times earnings before interest and taxes (EBIT)
can cover (pay) interest expense.
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