What Does Tort Liability Mean?

These liabilities are commonly the result of a legal situation called civil wrong. A civil wrong is a contract breach created by damages caused to the property covered by the contract. Normally, a legal court is the responsible entity that will determine the merits of the claim and the size of the liability, in case that the damages are effectively demonstrated. As a result, the victim is entitled to a compensation big enough to restore the damaged property back to its initial status.

In business scenarios, a tort liability will be created if certain individual damages a company’s infrastructure or equipment. The harm caused by the person will have to be properly assessed to establish the size of the liability. On the other hand, unsafe job conditions can also create potential tort liabilities if an employee gets hurt by an insecure job environment. These are very sensible situations for companies since the legal aftermaths can be quite large.

Example

Mr. Lawrence has three big Labrador dogs in his backyard. They normally behave appropriately but recently the neighbor’s dog (a female one) is going into heat and this has caused the dogs to behave erratically. Yesterday, one of the Labradors chew off a big portion of his neighbor’s backdoor and this of course created a lot of other problems to the property owner.

In this case, a de facto tort liability is created, since there is no argument for Mr. Lawrence not to pay for the damages. His neighbor, nevertheless, also stated that the damages made to the door also allowed the dog to enter the house causing additional damages on the inside. After an appraisal of the damage was made, Mr. Lawrence had to compensate his neighbor for $2,400 worth of damages.

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What does zero coupon bond mean?

What is the definition of zero coupon bonds? Companies, schools, and governments use bonds as a way to finance expansions and other long term projects. Usually the decision to issue a bond starts with a proposal for new projects. When the board or governing body approves the plans, a bond can be issued. Unfortunately, it isn’t that easy. Sometimes it can take a few months for the bond to be drafted and actually issued to the public. This presents a problem. The interest rate and terms of the bond are set when the bond is initially drafted up. By the time the bond actually hits the public, interest rates have usually changed.

That is why most bonds are either issued at either a premium or a discount. Since the stated interest rate of the bond can’t be changed at this point, the sales price of the bond is changed. A bond issued at a premium sells for more than the stated value. In other words, a $1,000 bond might sell for $1,100. A discounted bond is the opposite. The sale price is actually reduced lower than the stated price. A $1,000 bond might only sell for $900.

In an effort to get away from this problem, some companies don’t issue bonds with stated interest rates or zero-coupon bonds. Let’s take a look at an example.

Example

A Zero coupon bond is a bond that sells without a stated rate of interest. This way the company or government doesn’t have to worry about changing interest rates. These bonds are sold at a discount don’t pay a standard monthly interest percentage like normal bonds do. Instead, investors receive the gain of the appreciated bond at maturity. US savings bonds work this way. You can buy a $100 bond for $50 today. When the bond reaches maturity, it can be cashed or called for the full $100 face value. Instead of paying regular interest payments, it pays them in one lump sum at maturity.

Summary Definition

Define Zero Coupon Bond: Zero coupon bond is a debt instrument that is sold for less than its face value, does not make any interest payments to the bondholder, and can be redeemed for its face value at maturity. In this sense, it does pay interest. It’s just at the end of the investment instead of periodically throughout its life.

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What is Wages Payable?

The wages payable account is usually used at the end of a period like a year-end. Many times the end of the year doesn’t fall exactly at the end of a payroll period. For example, assume employees are paid every Friday and December 31 lands on a Tuesday. This means that at the beginning of the next year, January 1, the employer owes the employees two days worth of pay for the Monday and Tuesday worked in December.

Example

Since the employer pays the employees on Friday, these employees will have to wait until January 3 to get their full December wages. At the end of December, the employer owes the employees two days worth of pay, so it has to record that liability in its accounting system and present it on its financial statements.

How is Wages Payable Recorded?

On December 31, the employer simply debits the wage expense and credits the wages payable account for the Monday and Tuesday wages. Here is the wages payable journal entry.

Later in January when the wages are paid, the employer would debit the wages payable account because the wages are no longer owed to the employees and credit the cash account for the amount of cash paid to the employees.

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What Does Unearned Revenue Mean?

What is the definition of unearned revenue? GAAP requires businesses to use the accrual basis of accounting. This means that all revenues are recorded when earned regardless of when the cash is actually received. In other words, a customer who buys a shirt on December 31 and pays for in on January 1 is considered to have bought the shirt on December 31. The retailer records a December sale. This concept also applies for customers who put down deposits on sales.

Since the good or service hasn’t been delivered or performed yet, the company hasn’t actually earned the revenue. It records a liability until the company delivers the purchased product.

Let’s take a look at an example

Example

A good example of deferred revenue is a magazine subscription. Usually you pay for a 12-month magazine subscription upfront, but you don’t actually receive all of the magazines right away. You receive one magazine a month until the end of the year. This is considered unearned income to the company until it delivers all 12 months of magazines. Instead of recording revenue when the magazine subscription is purchased, the company records unearned revenue in a liability account.

When the magazines are delivered and the subscription is fulfilled, the deferral account is zeroed out to the revenues account. Here is an example journal entry.

Summary Definition

Define Unearned Revenue: Unearned revenue is a customer payment that a business recognizes as a liability because it is received before the goods or services are delivered to the customer.

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What Does Triple Net Lease Mean?

What is the definition of triple net lease? Net net leases are commonly found in the commercial real estate business where many landlords want fixed incomes. These leases transfer all taxes, utilities, maintenance, insurance, and rent obligations to the tenant.

NNN Leases typically have clauses that exclude major maintenance from those obligations because these expenses are considered capital expenditures and as such are usually the responsibility of the property owner. These leases are commonly used in many different types of commercial properties such as shopping malls, parking lots, and office buildings.

Let’s look at an example.

Example

Mr. Logan is the owner of a small shopping mall located in the city of New Jersey. He’s 72 years old and lives with his wife a few hours from the mall. He’s tired of having to deal with tenants and maintenance, so he decides to lease the property to a management company that could manage it and take care of all of the operating expenses. This way Logan will receive a fixed payment each month for the lease without worrying about problems.

A net-net-net lease issued by Mr. Logan (lessor) to a managing company (lessee) will allow him to pass on the operating responsibilities of the building to the management company. Thus, the management company will have to pay rent, taxes, maintenance, and insurance on the building. Logan will most likely have to agree on a smaller lease payment than he previously was used to receiving, but he will shift the upkeep costs and responsibilities to the third party.

Summary Definition

Define Triple Net Lease: NNN lease means a rental contract that stipulates the renter must pay all operating expenses of the property.

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What Does Subordinated Debt Mean?

What is the definition of subordinated debt? The junior debt is riskier than any other type of debt, and the risk is conversely related to its ranking. That means that the risk increases as the debt ranks lower and decreases as the debt ranks higher.

Therefore, the creditors should assess the borrower’ solvency to properly evaluate the risk associated with the debt on demand and consider if they should approve the loan or not. As a rule of thumb, in the case that a borrower defaults, the junior debt is paid after all corporate debts and loans are compensated in full.

Let’s look at an example.

Example

Company ABC is a large corporation that operates in the pharmaceutical industry. The company issues two types of bonds with different maturity and different face value. Bond A has a face value of $5,000, and it matures in 10 years, and Bond B has a face value of $10,000, and it matures in 20 years.

In the year 2, the company faces extreme financial hardships, and it has to go out of business. Therefore, it has to liquidate its assets to pay off its total debt. The court determines that the money that the company owes to the bondholders of Bond B is the company’s primary debt. So, these bondholders will be compensated first. The money owed to the bondholders of Bond A is the company’s junior debt, and, therefore, it will be paid last.

In fact, the importance of junior debt increases when the debtor owes more than one creditor and the total value of assets is insufficient to compensate for all the liabilities at the time of default.

Summary Definition

Define Subordinated Debts: Subordinated debt means the lower ranking loans in bankruptcy hearings.

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What Does Short-Term Notes Payable Mean?

Similar to a check, short-term notes payable are negotiable and can be transferred between parties by endorsing them over. For example, assume that Bill lends Steve $1,000. Steve signs a promissory note stating that he must pay Bill the $1,000 principle plus 10 percent interest in six months.

After the first month, Bill decides he wants to consolidate some of his debts, so he endorses the promissory note from Steve to Todd to pay off his debt to Todd. Now Steve is obligated to pay the $1,000 plus interest to Todd.

Example

Short term notes payable usually come from business transactions dealing with short-term assets like inventory. Vendors typically give short-term loans to customers in order to purchase their annual inventory supplies.

For example, Ed’s Music is a musical retailer that purchases band and orchestral instruments to rent to high school students each year. Before the big rental season, Ed contacts his vendors and arranges a one-year loan for the new instruments. Ed purchases $100,000 of band instruments and signs a one-year note that includes 5 percent interest.

In this case, Ed would record the $100,000 loan by debiting cash and crediting short-term notes payable. Each month when he makes a payment, he would debit the notes payable and interest accounts and credit the cash account for the amount of the payment.

Companies also use short-term notes to extend the credit period of an existing note. For example, Ed might not be able to pay off his entire note in one year, so he takes out another short-term note to extend the terms.

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What Does Schedule of Accounts Payable Mean?

The schedule of accounts payable is useful for two main reasons. First and foremost, this schedule allows managers and the accounts payable department to track and organize the vendor accounts which need to be paid. For instance, most retailers and manufacturers buy inventory and goods from other businesses.

It is rare that these transactions paid in cash. Instead, the purchasing company simply puts the purchase on account and pays the seller within 30 days after the purchase. This system speeds up business transactions and allows businesses to buy goods easier.

Example

As you can imagine, businesses can have hundreds of other businesses on account. This can lead to some confusion as to what company must get paid when. The schedule of accounts payable can be prepared to show all the outstanding accounts payable, who is owed the money, and how much is owed. In other words, it’s a way to track the accounts payable.

The schedule of accounts payable can also be used to prove out the subsidiary and control accounts payable accounts at the end of a period. Since purchase orders are posted to the subsidiary accounts and the subsidiary accounts are posted to the control accounts, the subsidiary accounts need to be double checked. Management can double check or prove out the subsidiary accounts before they are posted by comparing them to the schedule of accounts payable.

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What Does Revenue Expenditure Mean?

These expenses are not added to the book value of the asset because they don’t provide any future benefit. Remember, the definition of an asset is a resource that provides a future benefit. These expenditures don’t provide a benefit, so they are expensed and reported on the income statement instead of being capitalized and reported on the balance sheet.

Example

An example of a revenue expenditure is an additional cost attached to a fixed asset like a piece of machinery. Some machines need to be cleaned and lubricated regularly. These costs don’t really add any value to the machine. They are just necessary to keep the equipment running.

Another example of a non-value adding cost is painting. Over time machines like lathes and drill presses tend to rust and corrode. In order to keep them operational, managers usually schedule them to be disassembled, sandblasted, repainted, and assembled. The entire process doesn’t add any value to the machine. It just maintains its integrity and keeps it from rusting away.

These revenue expenditures are in sharp contrast to betterments. Betterments are expenses that actually improve the performance or useful life of the asset. They not only keep the asset operational; they extend the operational life. Betterments are usually capitalized and added to the asset cost on the balance sheet. These improvements are then depreciated over time instead of being expensed immediately like revenue expenditures.

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What Does Promissory Note Mean?

What is the definition of promissory notes? Promissory notes usually refer to the borrower as the maker of the note. The borrower generally is said to have made the written agreement because he or she is initiating the transaction. The lender is referred to as the payee because it is the party that first pays the money to the borrower and then receives the payments at a future date. I know this is confusing. Just remember the maker is the borrower and the payee is the lender.

Businesses use notes to finance many different operations. Some companies use short-term notes to finance inventory purchases while other businesses use long-term notes to raise enough capital to purchase large equipment and machinery. Really this note is just a fancy way of saying a loan. Let’s take a look at an example.

Example

Ken’s Pizzeria is having problems with its oven and needs to purchase a new one. Unfortunately, it doesn’t have enough money to purchase one outright, so it approaches a bank. Ken, the maker of the note, asks the bank for $25,000 to purchase its new oven. The bank, the payee, reviews Ken’s financial statements and agrees on a 5-year note that pays 10 percent interest.

The official loan agreement is put in writing including the issue date, original principle amount, repayment date, rate of interest, and names of each of the parties involved. Remember, a promissory note is always in writing. If Ken gets a loan from a friend and doesn’t have a written agreement, it can’t possibly be a promissory note.

Summary Definition

Define Promissory Notes: A promissory note is a written contract that requires a borrower to pay back a lender an amount of money on a future date.

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