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Accounting for Liabilities & Contingencies Flashcards

Accounting for Liabilities & Contingencies Flashcards
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Estimated Liabilities: Property Taxes

Your company has to pay this expense if it owns property. We consider it to be an estimated liability because it may vary from one accounting period to another.

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Your company had a sales revenue of $100,000 last year, along with $5,000 in warranties. This year you have a revenue of $120,000. What is your estimated warranty liability?

5,000 / 100,000 = .05 (or 5%). 120,000 x 5% = 6,000

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Estimating Warranty Liability: Formula

Money Spent on Warranties in the Previous Year / Previous Year's Sales = Percent of Sales. Current Year's Sales x Percent of Sales = Warranty Estimate.

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Estimated Liabilities

Businesses plan for these costs without knowing exactly what they will be. They have to guess at the amounts. Examples can include pensions, property taxes, and warranties.

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Current Liabilities: Credit Accounts

These are recorded on the balance sheet when a company purchases something and agrees to pay for it later. These are usually paid off inside of a year.

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Current Liabilities

Financial obligations due in the current year. They're noted on the balance sheet and have a credit balance. Employee salaries are an example. You must know their amount before you record them.

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Long-Term Liabilities

Financial obligations that are not due for at least a year. These could include payments for vehicles, bonds, or mortgage notes. The full amount should be listed on year-end reports.

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Contingent Liabilities: Pending Lawsuits

These potential liabilities can occur when a company is sued, such as for age discrimination. These should only be recorded on the company's balance sheet if they're likely to lose the case.

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Liability Contingencies

These are expenses your company may face in the future. You should practice conservatism and estimate these at a higher level than you would estimate potential gains.

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Gain Contingencies

Events that would positively impact a business if they took place in the future. They should only be reported if you are very sure they will happen and you know how much you'll earn.

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21 cards in set

Flashcard Content Overview

This set of flashcards can help you go over gain and liability contingencies. You'll be able to review the difference between current, non-current, and estimated liabilities. These cards also provide you with practice identifying which accounts should be credited and debited when recording different liabilities.

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Gain Contingencies

Events that would positively impact a business if they took place in the future. They should only be reported if you are very sure they will happen and you know how much you'll earn.

Liability Contingencies

These are expenses your company may face in the future. You should practice conservatism and estimate these at a higher level than you would estimate potential gains.

Contingent Liabilities: Pending Lawsuits

These potential liabilities can occur when a company is sued, such as for age discrimination. These should only be recorded on the company's balance sheet if they're likely to lose the case.

Long-Term Liabilities

Financial obligations that are not due for at least a year. These could include payments for vehicles, bonds, or mortgage notes. The full amount should be listed on year-end reports.

Current Liabilities

Financial obligations due in the current year. They're noted on the balance sheet and have a credit balance. Employee salaries are an example. You must know their amount before you record them.

Current Liabilities: Credit Accounts

These are recorded on the balance sheet when a company purchases something and agrees to pay for it later. These are usually paid off inside of a year.

Estimated Liabilities

Businesses plan for these costs without knowing exactly what they will be. They have to guess at the amounts. Examples can include pensions, property taxes, and warranties.

Estimating Warranty Liability: Formula

Money Spent on Warranties in the Previous Year / Previous Year's Sales = Percent of Sales. Current Year's Sales x Percent of Sales = Warranty Estimate.

Your company had a sales revenue of $100,000 last year, along with $5,000 in warranties. This year you have a revenue of $120,000. What is your estimated warranty liability?

5,000 / 100,000 = .05 (or 5%). 120,000 x 5% = 6,000

Estimated Liabilities: Property Taxes

Your company has to pay this expense if it owns property. We consider it to be an estimated liability because it may vary from one accounting period to another.

Liability by Contract

A liability that is governed by a signed document that lists out the terms of a business arrangement.

Liability by Agreement

These are arrangements between at least two businesses that the law cannot enforce. They are not governed by a specific contract.

Liability by Law

Liabilities that a company is legally required to provide payment on. Taxes are an example of this kind of liability.

Accounting Records

These are debited and credited as money moves through a company. They are named for their function. Money is generally debited from expense accounts and credited to payable accounts.

Hannah's Hot Pies pays workers on the 15th every month. How is this payment recorded when the month ends?

The total amount will be debited from the Wages Expense account and credited to the Wages Payable account.

Your company found out that it dumped toxic waste into a lake. The cleanup cost will be $100,00. How would you record this in your accounting journal?

Debit money from the Cleanup Expense account and credit the same amount to the Cleanup Loss Payable account.

You think your company will need to pay out $2,000 in warranty claims this year. Which accounts would this be recorded in?

The warranty expense account should be debited, the warranty liability account should be credited.

Big Brad's Burgers accrued $10,000 on the 4th to pay employees on the 12th. How will Big Brad record this payment in his accounts on the 4th?

He will debit the money from Wages / Payroll Expense and credit it to Wages / Payroll Liability.

Big Brad's Burgers accrued $10,000 on the 4th to pay employees on the 12th. How will Big Brad record this payment in his accounts on the 12th?

He will debit the money from Wages / Payroll Liability and credit it to Cash.

Current Liabilities: Examples

These liabilities typically include accrued income tax, loans, notes payable, accounts payable, current maturities of long-term debt, and accrued expenses.

Non-Current Liabilities: Examples

Liabilities in this category include deferred income taxes, other liabilities, and long-term debt.

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