LEARNING OUTCOMES

LEARNING OUTCOMES

At the end of the topic, the student should be able to:

 Do the trade Creditors  Bills Payable  Long Term Borrowings And Mortgages

A current liability represents a current obligation of an enterprise resulting from preceding events whose payment is expected to lead to an outflow of resources from the enterprise.

The following can be classified as current liabilities:  Trade creditors

 Bills payable  Accrued expenses  Income received in advance  Bank overdraft  Value Added Tax (VAT) payable to the Receiver of Revenue  Declared dividends payable  Instalments payable on Interest bearing borrowings

10.1 TRADE CREDITORS

This type of liability results from the purchase of goods and services on credit. When creditors are paid within a specific period according to an agreement, the entity may get a discount on the outstanding account.

This is a short term-obligation of an enterprise which should be shown as trade edito s at the a ou t o i g u de the headi g u e t lia ilities i the Statement of Financial Position (Balance Sheet).

10.2 BILLS PAYABLE

A bill payable is a bill which is accepted by the entity and in which the entity undertakes to pay a certain amount on a specific or specifiable future date to the bearer of the bill. Bills payable, like bills receivable, are negotiable documents.

If bills are frequently used in an entity, a bills payable journal can be used as the book of first entry; if not the general journal is the book of first entry.

When merchandise is purchased on credit the purchases or inventory account is debited and the creditor's personal account and the creditors control account are credited. When a bill is accepted the creditor's account and the creditors control account are debited by the amount of the bill and the bills payable account is credited. On payment of the bill, bank is credited and the bills payable account debited.

These can be presented as proof of liability towards a creditor, or an amount o a ope t ade edito s a ou t a e o e ted i to a ill. Bills pa a le may bear interest or be interest free.

10.3 OTHER ARREARS OR ACCUMULATED OBLIGATIONS

Accumulated obligations emanate from transactions that have already been concluded and are usually payable in the near future. Therefore they are classified as current liabilities. Telephone costs incurred by the enterprise during the last month of its financial year will not be payable at the end of the financial year, because the account would not have been received at the close of business. The same applies to the enterprises account for water and electricity consumed in the last month.

10.4 CREDITORS CONTROL ACCOUNT

The creditors control account in the general ledger represents all the individual creditors in the creditors (subsidiary) ledger.

The creditors control account reflects a summary of the individual creditors' transactions and the balance of the creditors control account must be equal to the total of the individual creditors' account balances.

Posting to the personal accounts of the creditors takes place on a daily basis. Once a month, when the totals of all the creditors control columns in the entire subsidiary journals have been determined; the amounts are posted to the creditors control account.

The procedure can be summarised as follows:

Individual entries in the Posted to Personal accounts of creditors purchases journal

(credit side) in the creditors ledger on the day the transaction took place

Creditors control account Total of the creditors control

Posted to

(credit side) on the last day of column in the purchases

the month

journal

Individual entries in the Posted to Personal accounts of creditors purchases returns journal

(debit side) in the creditors ledger on the day the transaction took place

Total of the creditors control Posted to column in the purchases

Creditors control account returns journal

(debit side) on the last day of the month

Individual entries in the cash Posted to Personal accounts of creditors payments journal

(debit side) in the creditors ledger on the day the transaction took place

Total of the creditors control Posted to Creditors control account column

(debit side) on the last day of payments journal

in the

cash

the month

Provision can be made in the general journal for analysis columns for the debtors and creditors control accounts. The entries made in the general journal that affect creditors must also be posted on a daily basis to the Provision can be made in the general journal for analysis columns for the debtors and creditors control accounts. The entries made in the general journal that affect creditors must also be posted on a daily basis to the

At the end of the month all the accounts in the general ledger and subsidiary ledgers must be balanced and a list with all the outstanding creditors' balances compiled. The balance on the creditors control account must be equal to the total of the creditors list. If not, an error was made either when posting to an individual creditor's account in the creditors ledger or when posting the totals of the journals to the creditors control account. The accountant must then determine the reason/s for the difference/s and make the necessary corrections.

10.5 NON-CURRENT LIABILITIES

A non-current liability is a liability which is payable at the end of the financial period, after a period of more than one year. The entity usually provides security for this type of loan.

In this course we will concentrate on long-term borrowings, namely long-term loans, mortgage loans and debentures.

Long Term Borrowings and Mortgages

Long term borrowings are usually made for the purpose of acquiring non- current assets and are, therefore, mostly secured liabilities. In terms of property a loan can be obtained by registering a bond over a property concerned at a Registrar of Deeds. The registration is known as a mortgage, and the loan is therefore referred to as a mortgage loan.

Long-term borrowings must be disclosed under non-current liabilities on the statement of financial position. When an installment on a loan is payable during the next financial year, the installment must be disclosed as a current liability in the statement of financial position of the current year.

Debentures

A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of

In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money.

Convertible Debentures

A type of loan issued by a company that can be converted into stock by the holder and, under certain circumstances the issuer of the bond. By adding the convertibility option the issuer pays a lower interest rate on the loan compared to if there was no option to convert. These instruments are used by companies to obtain the capital they need to grow or maintain the business.

Convertible debentures are different from convertible bonds because debentures are unsecured; in the event of bankruptcy the debentures would

be paid after other fixed income holders. The convertible feature is factored into the calculation of the diluted per-share metrics as if the debentures had been converted. Therefore, a higher share count reduces metrics such as earnings per share, which is referred to as dilution.

Non-convertible debentures

Non-convertible debentures, which are simply regular debentures, cannot be converted into equity shares of the liable company. They are debentures without the convertibility feature attached to them. As a result, they usually carry higher interest rates than their convertible counterparts.