Topic 7 Accounting For Liability And Owner Equity


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Topic 7 Accounting For Liability And Owner Equity

  1. 1. 1<br />Topic 7<br />ACCOUNTING <br />FOR LIABILITY<br /> AND<br /> OWNER’S EQUITY<br />
  2. 2. 2<br />Current Liability<br />An obligation that needs to be settled within one year.<br />Creditors<br /> An amount owed to the supplier, for stock purchased.<br />Unearned Revenue<br /> Cash received and recorded before the services being performed or stock delivered.<br />Accrued Expense<br /> An expense charged but still unpaid or recorded at the period in which the financial statement is prepared.<br />
  3. 3. 3<br />2. Long Term Liability<br />An obligation that need to be settled in a period of more<br />than one year.<br />Example: Long-term loan, Bond and Mortgage.<br />Issuing Procedure:<br /><ul><li> number of bond to be authorized
  4. 4. total face value: amount of principal the issuer must pay at the maturity date.
  5. 5. contractual interest rate: the interest paid by the borrower and the investor received.</li></li></ul><li>4<br />How do we account or record the Long-term Loan?<br />Example:<br />On 1 Jan 2007, Truth Company issued a 1,000 unit of bond for 10 years at RM1,000 (9% interest) at 100% face value.<br /> i. To record the principal<br /> 1 Jan 2007:<br /> Dr. Cash 1,000,000<br /> Cr. Bond Payable 1,000,000<br />(To record sale of bond at face value)<br />
  6. 6. 5<br />To record the interest payable.<br />Assume the interest is paid twice a year <br /> i.e. 1 January and 1 July 2007.<br /> 1,000,000 x 9% x 6/12 = RM45,000.<br />1 July 2007<br />Dr. Interest expense 45,000<br /> Cr. Cash 45,000<br /> (To record payment of bond interest)<br />
  7. 7. 6<br />Adjusting Entry: 31 December 2007<br /> Dr. Interest expense 45,000<br /> Cr. Interest payable 45,000<br /> (To record interest payable)<br />When the interest is paid on 1 Jan 2008<br />Dr. Interest payable 45,000<br /> Cr. Cash 45,000<br />At the Year 10:(maturity date)<br />Dr. Bond payable 1,000,000<br /> Cr. Cash 1,000,000<br />
  8. 8. 7<br />LOANS PAYABLE BY INSTALMENT<br />Entities may borrow money from a single borrower in the form of loan.<br />It is common for such loans to be repayable by instalment, e.g. mortgages.<br />A mortgage is a loan secured by a charge over property.<br />If the borrower is unable to repay the loan, the lender may sell the property and use the proceeds to repay the loan.<br />
  9. 9. 8<br />Accounting for Loans Payable by Instalment<br />Mortgage payments consist of:<br />Interest expense and<br />Reduction of loan liability<br />Journal entry to record mortgage payment<br />Mar 31 Interest Expense 1 000<br /> Loan Payable 9 000<br /> Cash at Bank 10 000<br /> (To record loan repayment for March) <br />
  10. 10. 9<br />Components of Long-Term Debt<br />Entities often have a portion of long-term debt that falls due within the coming year.<br />This portion of the long-term debt should be classified as a current liability.<br />The remainder will be classified as a non-current liability.<br />An adjusting entry is not necessary to recognise the current portion of the liability. It is recognised by proper classification on the balance sheet.<br />
  11. 11. 10<br />Owner’s Equity<br />Definition:<br /> The ownership claims towards the asset owned by the business.<br />Factors affecting the owner’s equity:<br /><ul><li>Additional capital: increased the amount of owner’s equity.
  12. 12. Drawing: reduced the amount of owner’s equity
  13. 13. Profit and Loss:</li></ul> Profit increase the owner’s equity <br /> Loss decrease the owner’s equity<br />