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Chapter 9

COMMERCE 1AA3 Chapter Notes - Chapter 9: Contingent Liability, Harmonized Sales Tax, Accrual

Course Code
Emad Mohammad

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Chapter 9 – Liabilities
Learning Objective One: Explain and Account for Current Liabilities
Current liabilities are obligations due within one year, or within the company's normal
operating cycle, if it is longer than one year
Obligations that are due beyond are classified as long-term liabilities
Two types of current liabilities
o Known amounts
o Estimated amounts
Current Liabilities of Known Amount
Short-Term Borrowings
Companies sometimes need to borrow money on a short term basis to cover temporary
shortfalls in cash needed to run their business
A line of credit allows a company to access credit on an as-needed basis up to a maximum
amount set up by the lender
Accounts Payable
Amounts owed for products or services purchased on credit are accounts payable
Accrued Liabilities (Accrued Expenses)
An accrued liability results from an expense the business has incurred but has not yet
been billed for or paid for
An accrued expense creates a liability
Common types of accrued liabilities
o Salaries and wages payable
The liability for salaries, wages, and related payroll expenses not yet paid at
the end of the period
o Interest payable
Company's interest payable on notes, loans, and bonds payable
o Income taxes payable
The amount of income tax the company still owes at the year-end
Short-Term Notes Payable
Short-term notes payable are notes payable due within one year
Sales Tax Payable
The federal government and most provinces levy taxes on the sale of goods and services
o Sellers collect these taxes from customers, creating sales tax payable to the
government by levying the tax
Canada has three types of sales taxes
o Goods and services tax (GST) is a value-added tax levied by the federal government
o Provincial or regional sales tax (PST) is a retail tax applied to goods and services
purchased for individuals or by businesses for their own use, not for resale, with the
rates varying by province or region
o Harmonized sales tax( HST), which combines GST and PST, is also a value added-tax
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The final consumer of a GST or HST taxable product or service bears the tax, while entities
down the supply chain from the end consumer do pay GST or HST, but receive an input
tax credit (ITC) equal to the tax they have paid
o Deducted from any GST or HST collected to arrive at the net GST or HST payable to
the government
GST or HST payable is always a current liability as it is payable annually, quarterly, or
monthly, depending on the collector's volume of business
GST and HST are remitted to the CRA, which in turn remits the provincial portion of the
HST to the respective provinces, with all GST and the federal government of the HST being
remitted to the federal government
PST is levied at the point of sale to the final consumer
Payroll Liabilities
Payroll, also called employee compensation, is a major expense for most companies
For service organization, compensation is the major expense, just as cost of goods sold is
the major expense for a merchandising company
Employee compensation takes different forms
o A salary is employee pay stated at a yearly or monthly rate
o A wage is employee pay stated at an hourly rate
o Sales employees often earn commission, which is a percentage of the sales the
employee has made
o A bonus is an amount over and above regular compensation
Salary expense represents gross pay
Salary expense creates several payroll entries, expenses and liabilities
o Salaries and wages payable is the employee's net pay
o Employee withholdings income tax payable is the employees' income tax that has
been withheld from paycheques
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o Canada pension plan payable and Employment Insurance Payable are the
employee's contributions to those two government programs that have been
withheld from their paycheques along with the employer's contributions to these
o Canada Pension Plan And Employment Insurance Expense is the cost of the
employer's contribution to these two government programs
Unearned Revenues
A business sometimes collects cash from its customers before it provides the goods or
services the customer has paid for
o This creates a liability called unearned revenue because the business owes the
goods or services to the customer
Current Portion of Long-Term Debt
The current-portion of long-term debt is the amount of long-term debt that is payable
within the next year
At the end of each year, a company reclassifies the amount of its long-term debt that
must be paid during the upcoming year
Current Liabilities That Must Be Estimated
A business may know that it has a present obligation and that it is probable it will have to
settle this obligation in the future, but it may be uncertain of the timing or amount of the
o IFRS requires the business to estimate and record a provision for this obligation in
its financial statements
A provision is a specific type of contingent liability
Estimated liabilities vary among companies and include such things as warranties,
employee pension obligation and corporate restructuring costs
o Warranty liabilities are the most common
Estimated Warranty Payable
Many companies guarantee their products under warranty agreements that cover some
period of time after their customers purchase them
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