1 answer

1. Explain the account type purpose and financial statement where Liability first appears. 2. Identify the...

Question:

1. Explain the account type purpose and financial statement where Liability first appears.

2. Identify the normal balance of the account and the side on which it increases and decreases for Liability.

3. Develop two transactions for Liability, one that results in an increase to the account group and one that results in a decrease to the account. For each transaction (increase/decrease) prepare the following information...

a. Written description of the business transaction

b. Explanation of an accounting principle or assumption that applies to the transaction.  

c. Journal entry of the transaction that involves at least two accounts, correctly formatted with the date, account name, debit or credit, and explanation line.

d. Demonstrate the accounting equation remains in balance after the transaction.

e. Show the effect on the financial statements first affected by the transaction.

All of these questions should be targeted towards the Liability account in Accounting/Accounting Equation.


Answers

Part 1

Liabilities are also classified in the statement of financial position on the basis of their nature:

  • Trade and other payables primarily include liabilities due to suppliers and contractors for credit purchases. Sundry payables which are too insignificant to be presented separately on the face of the balance sheet are also classified in this category.
  • Short term borrowings typically include bank overdrafts and short term bank loans with a repayment schedule of less than 12 months.
  • Long-term borrowings comprise of loans which are to be repaid over a period that exceeds one year. Current portion of long-term borrowings include the installments of long term borrowings that are due within one year of the reporting date.
  • Current Tax Payable is usually presented as a separate line item in the statement of financial position due to the materiality of the amount.

Part 2

Liability has a debit balance normally. Accounting equation is Assets = Liabilities + Equity. It increases on the right side when liability increases with corresponding increase on left side too.

.

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