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 help assess both solvency and earning power. The GAAP call for classifying liabilities as either c…

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Accrued Liabilities

Definition and Explanation Accrued liabilities result from non-transaction economic events. Their recognition is generally triggered not by transactions but when a financial statement date is passed. Typically, accrued liabilities are very short-term in nature. Indeed, many are paid by the time financial statements are released. Unless there is special significance concerning the nature of the acc…

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Contingencies and Their Effects

Definition and Explanation Given that 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 is defined as “an existing condition involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.”…

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Third-Party Liability

Definition Companies may find that they have liabilities to an agency or other organization with which it has had no direct transaction. This is known as third-party liability, and it can arise for various reasons. Example Suppose that a company, as a third party to transactions between its employees and the government, withholds income and social security taxes from paychecks. Until those amounts…

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Collateral Agreement

To reduce the creditor’s risk and thereby obtain financing more easily and cost-effectively, 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 the event that the amount due cannot be paid. In practice, collateral ag…

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Deferred Credit

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

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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 under different definitions of the base income to which the bon…

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