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Liabilities

Business Accounting Bookkeeping The Ultimate Accounting Refresher Course The Accounting Equation - The Basis of Double Entry Bookkeeping
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Transcript

Okay, so welcome to this lecture today. My name is Justin Smith from the numbers and we're going to be talking about the liability side now of the equation. So just remember when liabilities increase, they get credited and when they decrease, they get debited. These liabilities are future economic sacrifices if you remember part of the definition. So let's get started with the first transaction. So let's say for example, you receive an insurance invoice on account.

So what is the cash being affected? Well, no, it's not because this is actually on our supplies account. What is the nature of this transaction? We're actually Inc we're actually purchasing insurance. Is there a future benefit to us? Well, not really, because we're actually consuming this immediately.

But there's a future sacrifice because we're gonna have to pay it as supply. And was anything earned costs incurred or assets consumed? Well, in this case, yes, we've actually incurred costs. Now, in this case, for this example, we're going to assume that this insurance invoice that we purchase is for the current period, and we're going to consume it for this particular period. We're not buying upfront as in like a prepayment. This is just for the current month.

So if this was just buying, say in insurance or any kind of invoice for an expense on account, what would actually happen is our liability account will go up, because accounts payable will go up because we have to pay the supply at the same time we've incurred cost. So therefore, our owner's equity decreases and insurance expense goes up. So the liability account for accounts payable goes up and it gets credited and the insurance expense gets debited. Second example would be if we had wages The way that we needed to accrue so we accrue for weekly wages. So is cash being affected? Or no, we're not actually paying any cash as yet to our stuff.

This is just the accrual for what is the nature of this transaction where we've actually incurred costs for the wages for the past week? Is there a future benefits sacrificed or negative future benefit? Well, in this case, it's actually a separate future sacrifice. So therefore, that may indicate to you that a liability account is going to be affected because we will have to pay this in the future to our our employees. And then was anything could cost in total SS consume? Yes, there's actually been costs incurred because we have used the time of employees to do work and that will be paid in the future.

So therefore have actually incurred a cost. So in this case, the liability count will go up, because we need to accrue the wages which will be paid in the future, the future sacrifice in the future at the same time, we've incurred a cost. So therefore, owner's equity will decrease, wages expense increases. So therefore, the accrued wages, which is a liability account will actually get credited. And the wages expense account gets debited. The next example would be when you actually pay for the wages, so the wages are paid for the quick.

So this follows on from the previous transaction where in this case, is cash being affected? Well, in this case, yes, this is now where cash is affected because we've actually paid the wages. So if we're not cash at bank will be one of the accounts and that will decrease because it's a cash outflow we're actually paying is what is the nature of this transaction? We're actually paying wages. Okay. So if you remember from the previous transaction, we've accrued the wages now we're actually paying the wages.

So that may indicate to you that there is a previous liability that will be affected. That may help indicate if you still don't know that the other side is it isn't a liability. We'll keep going. Is there a future benefit future session For some negative future benefit, well, there's actually no sacrifice because previously we've had the sacrifice. So if anything, they may indicate that that we're actually going to get rid of the sacrifice because without paying for that sacrifice, and with anything costs incurred or assets consumed, we as costs have been. No cost have not been incurred, because we're actually now just physically paying the cash and cash bank goes down, therefore, asset decreases and the liability cap will actually go down, because we've previously accrued the cost when it was incurred.

Now all we're doing is paying for it in a different period under the accrual accounting system, so in which case, the actual cash or bank goes down, it gets credited and the accrued wages cast gets debited. Another example could be when you actually pay your supplies. So where is cash being affected? Well, when we pay a supplier Yes, cash is going to decrease what is the nature of the trade section where we're actually paying suppliers. So when you think we're paying the supplier suppliers accounts payable, therefore that's going to decrease, because we're actually no longer going to be a future sacrifice sacrifice will decrease. At the same time, the future benefit will decrease by cash going out the door.

And in this case, there's no cost incurred because it was previously it previously would have been, the expense would have been taken up. So what we're doing now is the asset is decreasing by cash bank going down and the liability account is going down. So therefore, because asset has decreased, the asset account gets credited and the liability account gets debited. So continuing with liabilities, let's say a customer pays in advance but the service is not yet performed. So, is cash being affected will yes a customer has paid you in advance. So therefore cash has gone up and what is the next Should this transaction?

Well, a customer has paid us in advance. So you may it may indicate to you that the fact that the service has not yet been performed is actually an earned because we've been paid but we haven't delivered what we want what the service actually is, is there a future sacrifice was a future benefit because of cash but there is a future sacrifice because unearned revenue is actually considered a liability and we will have to perform that service in the future. So from a business's perspective, we owe that customer the service for the revenue that's not yet earned. And nothing has yet been earned. Because we haven't actually delivered on that service or product. So, in which case, cash or bank has actually gone up so it gets debited and the unearned revenue or revenue and events account which is liability account goes up which is liability.

And therefore, from a T account perspective, the cash at Bank has gone up and the unearned revenue which sits unlike liability side gets credited. So now that the service has actually been completed for what the customer previously paid you in the previous transaction or in the in another example the product could be delivered. So which case is cash being affected will know, you've previously been paid for this there is no indication that cash has moved in this transaction. What is the nature of the transaction? Well, we've completed the service so therefore we would. So the future benefit, there is the future benefit future sacrifice will if anything, the future sacrifice is decreasing, because we are vet she seems to have that service and we've actually now earned the revenue so in which case the unearned revenue cap gets debited because we've now earned that revenue and we move it to owner's equity.

So profit increases owner's equity increases in revenue goes up therefore, that unearned revenue account gets debited, which now eliminates the previous transaction, which was a credit, certainly its deficit and sales revenue account gets credited. The next example could be where you're actually taking a loan to take it out to fund the business. So say you need working capital to actually help us in your day to day operations to spend on marketing expenses or to invest in your projects. This is the example we're talking about here. So is cash being affected? Well, in this case, when you actually take out a loan, you're actually going to receive some cash to actually be to be able to be used within your business.

So yes, cash has been affected. What is the nature of this transaction? We're actually taking out a loan. So when you think loan, you think liability, long term liability, so therefore that may indicate to you that a liability is affected? Is there a future benefit? Well, yes, if we're, if we're going to take out a loan that will actually use cash therefore that is a benefit and at the same time, we have a future sacrifice Which is that long that we're going to need to pay back to the bank or to the bar, whoever's lent us the money.

And at this stage no costs have been incurred or anything that earned us yet. So in which case, the cash at Bank asset goes up and therefore cash or bank has gone up because we're taking it the loan to fund the business and the borrowings which is liability has gone up, and therefore, that gets credited to liabilities or borrowings or loans. So the two accounts borrowings loans is different terms used in practice, but we'll assume that that's just a long term liability borrowing account. That gets credited and the cash of bank account gets debited when we received the funds. Okay, so that covers the liability side. In the next lecture, we're going to be talking about equity.

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