Accounting 2 Dersi 4. Ünite Sorularla Öğrenelim

What are the main characteristics of liabilities?

• They occur because of a past transaction or event.

• They create a present obligation for future payment of cash or services.

• They are an unavoidable obligation.

What is the difference between accounts payable and current liabilities?

Accounts Payable are typically short term as credit terms are usually between 30 and 90 days while current liabilities generally take up to 12 months to be paid.

What are the financing options available for the companies in order to finance the acquisition of assets?

Debt financing and equity financing are the two options available for the financing options.

Explain the relationship between "unearned revenues"  and "earned revenues".

Customers may make advanced payments for the goods or services they will receive in the future. When the company receives an advanced payment, an obligation occurs for delivering the goods or rendering the service for which the customer has made payment. Therefore, company must record a liability in its financial statements and this liability is named unearned revenue. In this context, unearned revenues can be defined as the payments received in advance for the products or services being provided. Unearned revenue should be converted into earned revenue as consistent with the matching principle. In other words, the unearned revenue must be closed and revenue must be recognized in the income statement to the extent the goods are delivered or the service is rendered.

How can 'liquidity' be explained?

It's the ability of a company to be able to pay all of its current liabilities.

What are liabilities?

Liability is defined as the present obligation of a company arising from past events and fulfillment of which causes the outflow of economic benefits in terms of payments of cash, transfer of assets or rendering of services.

How many categories can liabilities be split into?

There are two categories liabilities can be split. These are short term “current liabilities'' and long term “non-current liabilities'' liabilities. 

How should current liabilities be paid?

Current liabilities must be paid either with cash or with goods and services within one year or within the entity’s normal operating cycle if the operating cycle is longer than a year.

What are short term bank loans?

Companies generally need short term financing in order to use in their normal operations and they borrow these funds from banks with short-term maturities. These borrowings from banks to be fully repaid in the same fiscal year is classified as Short-Term Bank Loans. This type of loans are borrowed with the intention to repay from the collections of receivables that will be generated by the sales of goods.

How long does it generally take for a company to pay for its liabilities?

The current liabilities are obligations that will be paid out of current assets and are due within a short time, usually within one year.

Why do companies prefer taking long-term borrowings?

In case of borrowings with high amounts, companies prefer longer maturities, so that it is expected to be easier to pay the loan back and protect the liquidity of company at the same time.

How can " a line of credit " be described?

A very common form of short-term bank loans is the “line of credit”. A line of credit is offered by banks, or credit unions, to companies up to a maximum amount.

What is an accrued expense? Explain and give examples.

Matching principle requires the recognition of expenses in the period in which they incur to generate revenues. Therefore, as of the end of period, all expenses should be recorded independent from whether they are paid or not. When an expense incurs but is not paid yet, it should be recorded as accrued expense. In other words, accruals can be defined as liabilities for unpaid expenses. The most common examples of accrued expenses are interest payable, salaries payable, income taxes payable etc.

What do companies do when they don't have enough funds to close their payables?

Additionally, in cases that companies do not have enough funds to close their existing payables, they may issue notes in order to extend the maturity. These notes are also recorded as current liabilities unless their extended maturities end after the fiscal year.

What is a "contingent liability"?

A contingent liability is a potential liability because it depends on a future event. If a possible obligation arises from past events but its existence can only be confirmed depending on the occurrence of one or more future events, the obligation under question is a contingent liability.

What is the difference between "VAT Payable" and "VAT Deductible"?

At the end of each fiscal year, these two accounts on VAT are considered. If VAT received exceeds the VAT paid, this means the seller company has collected more than what it has already paid to government as VAT. Then at year-end, a liability account should be recorded: VAT Payable. Company has to pay this amount to tax office. In opposite case, where VAT paid is more than VAT received, this means that the company has paid more tax. Then, it collected from customers on behalf of government. The excess amount is recorded in an asset account; VAT Deductible. This amount represents a tax receivable from government and is carried forward to the next year in order to be deducted from VAT tax liability.

What is the difference between "wage" and "salary"?

“Salaries” are monthly payments to employees whereas “wages” are the payments to employees on an hourly basis.

What are non-deductible expenses in taxation?

Tax authorities do not allow some expenses to be used as a deduction in taxable income. Thus, these expenses in general are called “non-deductible expenses”.

What is an 'estimated liability'?

The term “estimated liabilities” is defined as the present obligations with uncertain amounts to settle. That amount is the best estimate of the amount that an entity would rationally pay to settle the obligation at the balance sheet date.

Explain 'solvency' of a company.

It is the ability to pay all a company's liabilities whether they are current or long-term.