2. 2
1. Current Liability
An obligation that needs to be settled within one year.
• Creditors
An amount owed to the supplier, for stock purchased.
• Unearned Revenue
Cash received and recorded before the services being
performed or stock delivered.
• Accrued Expense
An expense charged but still unpaid or recorded at the
period in which the financial statement is prepared.
3. 3
2. Long Term Liability
An obligation that need to be settled in a period of more
than one year.
Example: Long-term loan, Bond and Mortgage.
Issuing Procedure:
number of bond to be authorized
total face value: amount of principal the issuer must
pay at the maturity date.
contractual interest rate: the interest paid by the
borrower and the investor received.
4. 4
How do we account or record the Long-term
Loan?
Example:
On 1 Jan 2007, Truth Company issued a
1,000 unit of bond for 10 years at RM1,000
(9% interest) at 100% face value.
i. To record the principal
1 Jan 2007:
Dr. Cash 1,000,000
Cr. Bond Payable 1,000,000
(To record sale of bond at face value)
5. 5
ii. To record the interest payable.
Assume the interest is paid twice a year
i.e. 1 January and 1 July 2007.
1,000,000 x 9% x 6/12 = RM45,000.
1 July 2007
Dr. Interest expense 45,000
Cr. Cash 45,000
(To record payment of bond interest)
6. 6
Adjusting Entry: 31 December 2007
Dr. Interest expense 45,000
Cr. Interest payable 45,000
(To record interest payable)
When the interest is paid on 1 Jan 2008
Dr. Interest payable 45,000
Cr. Cash 45,000
At the Year 10:(maturity date)
Dr. Bond payable 1,000,000
Cr. Cash 1,000,000
7. 7
LOANS PAYABLE BY
INSTALMENT
• Entities may borrow money from a single
borrower in the form of loan.
• It is common for such loans to be repayable
by instalment, e.g. mortgages.
• A mortgage is a loan secured by a charge
over property.
• If the borrower is unable to repay the loan,
the lender may sell the property and use the
proceeds to repay the loan.
8. 8
Accounting for Loans Payable by
Instalment
• Mortgage payments consist of:
– Interest expense and
– Reduction of loan liability
• Journal entry to record mortgage payment
Mar 31 Interest Expense 1 000
Loan Payable 9 000
Cash at Bank 10 000
(To record loan repayment for March)
9. 9
Components of Long-Term Debt
• Entities often have a portion of long-term
debt that falls due within the coming year.
• This portion of the long-term debt should be
classified as a current liability.
• The remainder will be classified as a non-
current liability.
• An adjusting entry is not necessary to
recognise the current portion of the liability.
It is recognised by proper classification on
the balance sheet.
10. 10
Owner’s Equity
Definition:
The ownership claims towards the asset owned by
the business.
Factors affecting the owner’s equity:
Additional capital: increased the amount of owner’s
equity.
Drawing: reduced the amount of owner’s equity
Profit and Loss:
Profit increase the owner’s equity
Loss decrease the owner’s equity
