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Chapter 10

ACCT 1220 Chapter Notes - Chapter 10: Accounts Payable, Interest Expense, Promissory Note

Course Code
ACCT 1220
Philippe Lassou

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Chapter 10 Reporting and analyzing Liabilities
Financial liability - contractual obligations to pay cash in the future
o Unearned revenue is not a financial liability while most of other liabilities are
financial liabilities
Paying an account payable by issuing a note payable would be settling a liability with a
Operating Line of Credit
Companies may use operating line of credit to manage temporary cash shortfalls
A floating (variable) interest rate is not fixed and based on prime borrowing rate
Collateral (security) is usually required by banks as protection against possible default on
the loan by borrower
Line of credit borrowings are on short-term basis and are repayable immediately upon
o Payment is rarely demanded without notice
o Borrowing from line of credit is easy to administer because it is to a certain limit
Sales Taxes
For retailers, sales tax is not recorded until revenue is earned
Amount of sales is recorded separately by crediting two accounts, sales and sales tax
o You would then debit cash
Property Taxes
Taxes charged by the municipal and provincial governments
Calculated at a specific rate
Recorded by debiting property tax expense and crediting property tax payable
o Modified by amounts of months passed
Employer’s incur 3 types of liabilities as they pay their employees for performing
services (salary related):
o The amount owed to employees
o Employee payroll deductions
o Employer payroll obligations
Total amount earned by an employee is called gross pay
o Gross pay is the first type of liabilities that the employers incur
Second type of liability:
o Employee payroll deductions (required by law) to deduct an amount from
employees gross pay
o Some payroll deductions are mandatory while some can be voluntary
Net pay an amount the company (employer) must pay the employee
Gross pay and net pay are very different
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