Question

Question: When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?

1. Acquisition of goods by purchase on credit.
2. Officers’ salaries.
3. Special bonus to employees.
4. Dividends.
5. Purchase commitments.

Short answer

Answer

1. When the ownership passes on to the purchaser.
2. When they become due at the end of a disbursement period.
3. When certified by the board of directors or person possessing the power to certify.
4. When they are declared.
5. No entry needed

Step-by-step solution

Meaning of liabilities

Liabilities are the financial obligations of a company that leads to the firm’s future sacrifices of financial advantages of other businesses.

Recording of acquisition of goods by purchase on credit

Goods bought on credit should be recorded when the possession of goods is passed on from seller to the buyer of goods. If the conditions of purchase are stated as f.o.b. destination, ownership passes when the goods bought reaches the buyer; if it is f.o.b. shipping time, ownership passes when shipment is created by the seller.

Recording of officers’ salaries

Officers’ salaries should be listed at the time of end of disbursement period. Unpaid amounts accrued should be listed while preparing financial statements dated other than at the end of the disbursement period.

Recording of special bonus to employees

A special bonus to employees should be listed upon approval by the board of directors, if the bonus is for a particular time period and if that period has ended at the approval date. However, if the time frame for which the bonus is applicable is yet to end but only a portion of it has expired, it would be right to accrue a pro rata part of the bonus at the time of approval and make surplus accruals of pro rata amounts at the end of each payment period

Recording of dividends

Dividends are normally recorded at the point when it is declared by the board of directors

Recording of purchase commitments

It is not mandatory for the buyer to make any entry for purchase commitments that is yet to be shipped by the seller. Ordinary orders, for which the rates are ascertained at the time of shipment and is entitled to cancellation by the purchaser or the vendor, do not display either an asset or a liability to the buyer and is not shown in the books or in the financial statements. Though, an accrued loss on purchase commitments which is obtained from formal purchase contracts for which a firm amount is in excess of the market rate at the balance sheet would be reflected in the liability portion of the balance sheet.