Simple vs Compound Interest

Interest is payment for the use of money for a specified period of time, Interest can be calculated on either a simple or a compound basis. The distinction between the two is important because it affects the amount of interest earned or incurred. Simple Interest Simple interest means that the interest payment is computed on …

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Notes Payable

What is Notes Payable? – Definition Notes payable is a liability that results from purchases of goods and services or loans. Usually, a written instrument that includes interest. It is a form of Long-term Debt. Explanation A firm may issue along-term note payable for a variety of reasons. For example, notes may be issued to …

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Future value of an annuity

What is the Future Value of an Annuity? The amount of a series of payments or receipts taken to a future date at a specified interest rate is called the future value of an annuity. Explanation An annuity is a series of equal payments made at specified intervals. Interest is compounded on each of these …

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Contingent Liabilities

What are Contingent Liabilities? – Definition Contingent liabilities are possible liabilities that may or may not occur, depending on some future events. or Contingent liabilities are potential future liabilities whose existence is contingent upon some future event. Explanation In effect, a contingent liability is the result of an existing condition or situation whose final resolution …

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Current Liabilities

Current Liabilities – Definition Current liabilities are those liabilities that will either be paid or require the use of current assets within a year (or within the operating cycle, if longer), or that result in the creation of new current liabilities. Current vs Long-term Liabilities In preparing a balance sheet, liabilities are classified as either …

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Liabilities

What are Liabilities? – Definition Liabilities are probable, non-ownership claims against the firm which must arise from events that occurred in the past and be expected to be satisfied in the future. Liabilities can be held by owners if they originate through transactions in which the owners acted in the capacity of nonowners. For example, …

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Measuring and recording liabilities

Liabilities are generally recorded and disclosed at the present value of the future payments computed using a realistic interest rate. The existence of a nominal interest rate that is unrealistic makes the measurement task more difficult. The effect of complying with the rule is the description of the proper relationship between the amount actually borrowed …

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Classification of liabilities and date of maturities

As the maturity date of a liability approaches, the working capital available for other uses is reduced. On the other hand, if the maturity date is in the distant future, the firm can commit its resources to long-run strategies. Thus, information about the remaining time to a liability’s maturity may be helpful for assessing both …

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Accrued liabilities

Definition and Explanation Accrued liabilities result from non-transaction economic events. Their recognition is generally triggered by the occurrence of a financial statement date rather than transactions. Typically, accrued liabilities are very short term in nature; indeed, many of them are paid by the time the statements are released. Unless there is some special significance concerning …

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Contingencies and their effects

Definition and explanation Because liabilities involve future cash flows, they are subject to uncertainties about whether they will be paid and the amount that will be paid. In the Standard, a contingency can be defined: “as an existing condition involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved …

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What is third-party liability?

Definition For various reasons, a company may find that it has liabilities to an agency or other organization with which it has had no direct transaction. Example For example, as a third party to transactions between its employees and the federal government, the firm withholds income and social security taxes from paychecks. Until those amounts …

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What is collateral agreement?

In order to reduce the creditor’s risk and thereby obtain financing more easily and cheaply, a borrower may enter into a collateral agreement in connection with a loan contract. Under this arrangement, the borrower agrees that a particular asset (or group of assets) will be sold and the proceeds applied to the loan balance in …

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What is a deferred credit?

Definition The term deferred credit has been used in accounting to identify balance sheet items that are not easily classified as either liabilities or owners ‘ equity. Explanation The category is occasionally used for accounts created by deferring income taxes and the benefits of the investment tax credit. It also arises when employees are compensated with …

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Bonus accrual

A special type of accrued liability arises when a firm agrees to pay a bonus to management contingent upon operating results. There are no substantive conceptual problems as to the classification or disclosures to be provided for liabilities created by these plans. The only difficulty lies in the calculation of the amount of the bonus …

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