Types of Liabilities quiz #1 Flashcards
Types of Liabilities quiz #1
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What are current liabilities in accounting?
Current liabilities are financial obligations due within one year, such as accounts payable, accrued expenses, unearned revenues, payroll liabilities, and current maturities of long-term debt. What is accounts payable and how does it arise?
Accounts payable refers to amounts owed to suppliers for goods or services received but not yet paid for, typically arising from day-to-day business expenses. How do accrued expenses differ from accounts payable?
Accrued expenses are liabilities for expenses that have been incurred but not yet paid, often recorded through adjusting entries, such as salaries, interest, and taxes payable, while accounts payable are amounts owed for invoices received. What are unearned revenues and why are they considered liabilities?
Unearned revenues are advance payments received from customers for goods or services not yet delivered, creating a liability because the company owes the customer the product or service. What types of obligations are included in payroll liabilities?
Payroll liabilities include taxes and benefits related to employment, such as social security taxes, health insurance, and other employment-related expenses that the employer must pay. What does 'current maturities of long-term debt' mean?
Current maturities of long-term debt refer to the portion of long-term loans that must be paid within the current year, such as the upcoming principal payments on a mortgage. What are long-term liabilities and how are they different from current liabilities?
Long-term liabilities are financial obligations due in more than one year, such as notes payable and bonds payable, whereas current liabilities are due within one year. What is a note payable and when is it considered a long-term liability?
A note payable is a formal loan agreement, usually with a bank, where the borrower agrees to repay the principal with interest. It is considered a long-term liability if it is due in more than one year. How do bonds payable work as a form of long-term liability?
Bonds payable involve raising money from multiple lenders by issuing bonds, each typically worth a set amount, to be repaid with interest over a period longer than one year. Can notes payable and bonds payable be classified as both current and long-term liabilities?
Yes, notes payable and bonds payable can be classified as either current or long-term liabilities depending on their repayment terms; the portion due within one year is current, and the remainder is long-term. Why might a company choose to issue bonds payable instead of taking a bank loan?
A company might issue bonds payable to raise large sums of money from multiple lenders, which may be difficult to obtain from a single bank. What is the main difference between accounts payable and accrued expenses?
Accounts payable are amounts owed for invoices received, while accrued expenses are liabilities for expenses incurred but not yet invoiced or paid, often requiring adjusting entries. What are some alternative names for unearned revenues?
Unearned revenues may also be called deferred revenues or customer deposits. How are payroll liabilities recorded on the balance sheet?
Payroll liabilities are recorded as current liabilities on the balance sheet, representing amounts owed for payroll taxes and benefits. What happens to the current portion of long-term debt after it is paid?
After the current portion of long-term debt is paid, the remaining balance continues to be classified as a long-term liability until it becomes due within the next year. How do adjusting entries relate to accrued expenses?
Adjusting entries are used to record accrued expenses, ensuring that expenses incurred but not yet paid are recognized in the correct accounting period. Why are unearned revenues not considered actual revenue until the service or product is delivered?
Unearned revenues are not considered actual revenue because the company has not yet fulfilled its obligation to deliver the goods or services to the customer. What is the relationship between notes payable and notes receivable?
Notes payable represent the borrower's obligation to repay a loan, while notes receivable represent the lender's right to receive repayment; they are opposite sides of the same transaction. What is the typical structure of a bond issued by a company?
A bond typically has a set face value, a stated interest rate, and a maturity date, and is sold to multiple investors who each lend a portion of the total amount needed. How are current liabilities important for assessing a company's short-term financial health?
Current liabilities are important for assessing a company's ability to meet its short-term obligations and manage its working capital effectively.