Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

OVERVIEW

Initially, the resources (assets) of a business have to come from an entity outside of the particular organization. Two main sources of resources are creditor sources (liabilities) and owners' sources (owners' equity). Liabilities are considered “temporary” sources of assets; whereas, stockholders' equity is a more “permanent” source of assets. When a company borrows money, it does so with the expectation of using the borrowed funds to acquire assets that can be used to generate more income. The objective is to generate an amount of additional income which exceeds the cost of borrowing the funds (interest).

Due to the nature of some business activities, an entity will commonly receive goods and services and not pay for them until days or weeks later. Therefore, at a specific point in time, such as a balance sheet date, we may find that a business has obligations for merchandise received from suppliers (accounts payable), for money it has borrowed (notes payable), for interest incurred (interest payable), for sales tax charged to customers which has not yet been remitted to the government (sales taxes payable), for salaries and wages (salaries and wages payable), and for amounts due to government agencies in connection with employee compensation (Federal Income Tax Withholdings Payable, FICA Taxes Payable, Federal Unemployment Taxes Payable, and State Unemployment Taxes Payable). Such payables are reported as current (short-term) liabilities because they will fall due within ...