product liability

Examples of product liability in the following topics:

• Liabilities

  • A liability is defined by the following characteristics:
  • Current liabilities: these liabilities are reasonably expected to be liquidated within a year.
  • Long-term liabilities: these liabilities are reasonably expected not to be liquidated within a year.
  • They usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.
  • Liabilities of the United States as a fraction of GDP (1960-2009)

• Components of the Balance Sheet

  • The balance sheet relationship is expressed as; Assets = Liabilities + Equity.
  • The balance sheet contains statements of assets, liabilities, and shareholders' equity.
  • Assets have value because a business can use or exchange them to produce the services or products of the business.
  • A business incurs many of its liabilities by purchasing items on credit to fund the business operations.
  • Differentiate between the three balance sheet accounts of asset, liability and shareholder's equity

• Classifying Liabilities

  • Liabilities are classified in different types.
  • The two main categories of these are current liabilities and long-term liabilities.
  • Current liabilities are often loosely defined as liabilities that must be paid within a single calender year.
  • A better definition, however, is that current liabilities are liabilities that will be settled either by current assets or by the creation of other current liabilities.
  • These usually include issued long-term bonds, notes payables, long-term leases, pension obligations, and long-term product warranties.

• Unearned and Deferred Revenues

  • A deferred revenue is recognized when cash is received upfront for a product before delivery or for a service before rendering.
  • If the deferred item relates to revenue (cash has been received), it is carried as a liability.
  • A deferred revenue is specifically recognized when cash is received upfront for a product before delivery or for a service before rendering.
  • In these cases, the earnings process is not complete when the cash is received, so the cash is recorded as a liability for the products or services that are due to the buyer .
  • If cash received is for benefits that extend past the current accounting period, a long-term liability would be recorded instead.

• Reporting Contingencies

  • For example, to accrue a provision for product warranty costs, assume that minor repairs cost 5% of the total product sales and an estimated 5% of products may require minor repairs within 1 year of sale.
  • Major repairs cost 20% and 1% of products may require major repairs in 3 years.
  • The provision is calculated by multiplying 5% of total product cost by 5% of products needing minor repair and then adding 20% of cost for major repair, multiplied by 1% of products needing major repair.
  • A warranty expense is debited for the provision amount that will offset product sales revenue in the income statement and a credit is posted to warranty provision liability.
  • The long-term liability warranty provision is moved to the current liability section in the accounting period occurring three years after the product sale.

• What Goes on the Balances Sheet and What Goes in the Notes

  • The balance sheet lists current liability accounts and their balances; the notes provide explanations for the balances, which are sometimes required.
  • Balance sheets are presented with assets in one section, and liabilities and equity in the other section, so that the two sections "balance. " The fundamental accounting equation is: assets = liabilities + equity ([).
  • Current liabilities and their account balances as of the date on the balance sheet are presented first, in order by due date.
  • Current liabilities can represent costs incurred for employee salaries and wages, production and build up of inventory, and acquisition of equipment which are needed and used up during normal business operations.
  • Current liability information found in the notes to the financial statements provide additional explanation on the liability balances and any circumstances affecting them.

• Preparation of the Balance Sheet

  • All balance sheets follow the same format: when two columns are used, assets are on the left, liabilities are on the right, and net worth is beneath liabilities.
  • Inventory includes goods ready for sale, as well as raw material and partially completed products that will be for sale when they are completed.
  • Fixed assets include furniture and fixtures, motor vehicles, buildings, land, building improvements (or leasehold improvements), production machinery, equipment and any other items with an expected business life that can be measured in years.
  • Liabilities are claims of creditors against the assets of the business.
  • These are debts owed by the business.There are two types of liabilities: current liabilities and long-term liabilities.

• Types of Businesses

  • Primary ownership types of businesses include corporations, cooperatives, limited liability partnerships (LLPs), limited liability companies (LLCs) and sole proprietorships.
  • The business owner has unlimited liability for the debts incurred by the business.
  • Businesses also vary by industry due to the wide variety of products and service they offer to the market.
  • Agriculture and mining businesses are concerned with the production of raw material, such as plants or minerals.
  • Manufacturers create products from raw materials or component parts, which they then sell at a profit.

• Reporting Current Liabilities

  • Current liabilities are reported first in the liability section of the balance sheet because they have first claim on company assets.
  • Liabilities are disclosed in a separate section that distinguishes between short-term and long-term liabilities.
  • In addition to current liabilities, long-term liabilities are listed in a separate section after current debt.
  • However, for all long-term liabilities, any amounts due in the current fiscal year are reported under the current liability section.
  • Current liabilities is the first section reported under liabilities on the balance sheet.

• Reporting Long-Term Liabilities

  • This is an example of a long-term liability.
  • "Notes Payable" and "Bonds Payable" are also examples of long-term liabilities, and they often introduce an interesting distinction between current liabilities and long-term liabilities presented on a classified balance sheet.
  • Continuing one year forward, Company X would report a current liability of 20,000 and a long-term liability of 60,000 on its balance sheet as of 12/31/2014.
  • What this example presents is the distinction between current liabilities and long-term liabilities.
  • Despite a Note Payable, Bonds Payable, etc., starting out as a long-term liability, the portion of that debt that is due within a year has to be backed out of the long-term liability and reported as a current liability.