ACCOUNTING

FOR
LIABILITIES

CHAPTER 5
 Explain the fundamental accounting requirements
related to liabilities, including recognition,
measurement, and presentation in financial
statements.

Identify and apply appropriate accounting accounts

in processing transactions related to liabilities.

Interpret financial information through financial

ratios.
OBJECTIVES
 1 2
Concept, Journalise Transactions
Recognition, and Related to Liabilities
Measurement of
Liabilities

3 4
Presentation of Financial Ratios
Liabilities on the
Financial
Statements

CONTENT
SECTION 1
Concept,
Recognition, and
Measurement of
Liabilities
 Concept and Recognition of Liabilities
Liabilities: Liabilities are the present obligations of an enterprise arising from past
transactions and events, which the enterprise must settle using its resources.

Recognition of Liabilities: Liabilities are recognised in the Statement of Financial

Position when both of the following conditions are met:
➢ It is sufficiently certain that the enterprise will have to expend resources (e.g., cash) to
settle the present obligation.
➢ The liability can be measured reliably.
 EXERCISE 1

• Which of the following cases are recognized as

liabilities?
• The company signs a loan contract for 2,000 million VND,
received via a bank deposit. The loan carries an annual interest
rate of 10% and has a term of 2 years. Both principal and
interest are paid at the end of each month.
• The company is sued by local farmers for causing
environmental pollution. The court has accepted the lawsuit and
is assessing the extent of the damage and its impact on the
farmers. According to the company's lawyer, the company is
certain to lose the case.
Provisions payable

A provision is a liability of uncertain value or timing. A

provision shall be recognized only when the following
conditions are met:
• The company has a present obligation as a result of a
past event.
• An outflow of economic benefits is probable, leading to
the need to settle the obligation.
• A reliable estimate of the obligation’s value can be
made.
 EXERCISE 2
Which of the following cases are recognized as
provisions payable?
• The company signs a contract to purchase raw
materials for 500 million VND. During the period, the
goods have been received into inventory, but payment
has not yet been made.
• The company commits to providing a 2-year warranty
for its sold products. Based on past experience, the
estimated warranty cost is 2% of total sales revenue.
During the year, the company achieved sales revenue of
40 billion VND.
Contingent liability

A contingent liability is:

• A possible obligation arising from past events, where
the existence of the liability will only be confirmed by the
occurrence or non-occurrence of one or more uncertain
future events beyond the company's control; or
• A present obligation arising from past events that has
not been recognized because:
(i) It is not probable that an outflow of economic benefits
will be required to settle the obligation; or
(ii) The amount of the obligation cannot be reliably
measured.
 EXERCISE 3
Which of the following cases are recognised as
contingent liabilities?
• The company commits to providing severance benefits to
employees upon termination. The estimated annual
severance payment is 1% of the total annual payroll.
• The company's product has gained strong market
recognition. However, in the past year, a consumer lawsuit
was filed, claiming the product caused health issues.
Authorities are investigating the cause. Internal company
information suggests that the issue was due to workers
selecting the wrong materials during production.
 Measurement of Liabilities

Liabilities are recorded at historical cost

• Long-term liabilities may require the use of the

discounted cash flow method to be presented
at present value.
• Foreign currency-denominated liabilities must
be revalued at the end of the period.
SECTION 2
Journalise
Transactions Related
To Liabilities
 Accounting for Account Payables
Account 331
Debit Credit
• Amounts paid to sellers, suppliers or contractors; ▪ Amounts payable to sellers, suppliers or
• Prepayment to sellers, suppliers, contractors but contractors;
materials, goods, services and constructions are not ▪ Adjustment of negative difference between
received; provisional price and actual price of amount of
• Amounts of sales approved by sellers; materials, goods and services when the invoice or
• Payment discounts and trade discounts which the notification of official price is received.
sellers approve for enterprises to deduct from trade ▪ Re-evaluation of trade payables in foreign
payables; currencies (if the foreign currency rate rises
• Value of materials or goods in shortage or inferior against VND).
quality which are received back by the sellers.
• Re-evaluation of trade payables in foreign currencies
(if the foreign currency rate falls against VND). Credit balance
Outstanding balance payable to sellers, suppliers or
contractors.
This account may have a Debit balance. Debit balance (if any) records prepayment to sellers or payment in
excess of payables to sellers, according to every specific subject. When preparing the balance sheet,
detailed balance of every subject reflected in this account will be taken to record to “Assets” and
“Capital” account. 14
 Method of accounting for several major transactions
(1) When purchasing materials or goods without payment for inventory using perpetual
inventory method or purchasing fixed assets:
Dr 152, 153, 156, 157, 211, 213 (VAT-exclusive prices)

Dr 1331 – Deductible VAT

Cr 331 – Account payables (total payment)

(2) When receiving services rendered (expenses incurred from goods transportation,
electricity, water, telephone, auditing, consultancy, advertisement and other services) from
suppliers:
Dr 1562, 242, 627, 641, 642, 811

Dr 1331– Deductible VAT

Cr 331 – Trade payables (total payment)

(3) When paying advance or paying trade payables to sellers, providers or contractors, the
following accounts shall be recorded:
Dr 331 – Account payables
Cr 111, 112, 341, etc

(4) When paying advance or paying trade payables to sellers, providers or contractors, the
following accounts shall be recorded:
Dr 331 – Account payables
Cr 111, 112, 341, etc

(5) When receiving back the advance from the seller because the seller fails to sell goods
or provide services, the following accounts shall be recorded:
Dr 111, 112, etc
Cr 331 – Account payables
 EXERCISE 4

The opening balance of account 331: 30 million. In detail

- Account 331 (supplier A), credit balance is 50 million.
- Account 331 ((supplier B), debit balance is 20 million.
1. The company buys materials for a price excluding VAT of 30 million on credit. (VAT
rate is 10%)
2. The company makes an advance to supplier D in cash 10 million.
3. Make payment to supplier A of 20 million VND by banking payment after deducting a
payment discount of 1 million VND.
Requirement: Record the transactions and determine the balance of each supplier.
 Accounting for Taxes and other payables to the State
Account 333
Debit Credit
• Deductible VAT during a period; ▪ Output VAT and VAT on import goods payable;
• Taxes, fees, charges and other amounts payable or ▪ Taxes, fees, charges and other payables to the
paid amount to the government budget; government budget;

• Taxes deducted from taxes payables;

• VAT of sales returns and sales rebates.

Credit balance
Taxes, fees, charges and other payables to the
government budget;
In particular case, Account 333 may have the debit balance. Debit balance (if any) of Account 333 reflects
tax payments and other payments greater than taxes and payables to State, or may reflect the paid taxes
eligible for exemption, deduction or refund, but the refund has not been made.
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 Method of accounting for several major transactions

Account 33311 (Output VAT)

(1) When issuing a VAT invoice and paying VAT using credit-invoice method, the income
shall be recorded according to VAT-exclusive prices (VAT payable shall be recorded
separately at the issuing time) as follows:
Dr 111, 112, 131 (total payment)
Cr 511, 515, 711 (VAT-exclusive prices)
Cr 33311 - VAT payable (Output VAT)
(2) Accounting for returned goods/ trade discounts/ sales rebates
Dr 521 – Revenue deductions (tax-exclusive prices)
Dr 3331 – Output VAT (VAT of trade discounts or sales rebates or returned goods)
Cr 131 – Accounts receivable (total amounts)
(3) Accounting for deductible VAT
Periodically, deductible VAT from output VAT payable during a period shall be determined
and recorded as follows:
Dr 3331 - VAT payable (33311)
Cr 133 – Deductible VAT
(4) When paying VAT to the government budget, the following accounts shall be
recorded as follows:
Dr 33311 – Output VAT
Cr 111, 112
 EXERCISE 5

1. A company sells goods worth VND 100 million (excluding VAT) at a 10% VAT rate and
receives payment via bank transfer.
2. A customer returns goods originally sold for VND 50 million (excluding VAT). The
applicable VAT rate is 10%.
 Accounting for Payables to employees
Account 334
Debit Credit
• Salaries, wages and bonuses, social insurance and ▪ Salaries, wages and bonuses, social insurance
other items which are paid or paid in advance to and other items which are paid to employees;
employees;
• Amounts deducted from salaries or wages of
employees

Credit balance
Outstanding salaries, wages and bonuses, social
insurance and other items payable to employees;

Account 334 may have debit balance. Debit balance of account 334 is particular – recording negative
difference between paid amounts and salaries, wages or other payables to employees (if any).

22
 Method of accounting for several major transactions
(1) When determining salaries or allowances payable to employees as prescribed, the following
accounts shall be recorded as follows:
Dr 622, 627, 641, 642
Cr 334 – Payables to employees
(2) When determining social insurance (illness, pregnancy, work-related accidents, etc) payable to
staff, the following accounts shall be recorded as follows:
Dr 338 – Other payables or receivables
Cr 334 – Payables to employees
(3) When determining personal income tax of staff and other employees of the enterprise payable to
the state, the following accounts shall be recorded as follows:
Dr 334 – Payables to employees
Cr 3335 – PIT payable
(4) When giving advance or paying salaries or wages to staff and other employees of enterprises
actually, the following accounts shall be recorded as follows:
Dr 334 – Payables to employees
Cr 111, 112
(5) When paying bonuses, the following accounts shall be recorded as follows:
Dr 334 – Payables to employees
Cr 111, 112
 EXERCISE 6
Journalise the transactions:
1. Disbursing cash for employee salary advances: 18,000,000 VND
2. At the end of the month, a payroll statement is prepared. The total salaries payable for each
department are as follows:
- Direct production workers: 20,000,000 VND
- Workshop staff: 8,000,000 VND
- Office staff: 10,000,000 VND
SALARY-BASED CONTRIBUTIONS
Determined based on employee salaries:
• Employer's Contribution: A portion is borne
by the company (recognized as an expense
and deductible for corporate income tax
purposes).
• Employee's Contribution: A portion is borne
by the employee (deducted from salary).
• Social Insurance (SI): Paid to the Social
Insurance Authority and disbursed to
employees according to regulations.
• Unemployment Insurance (UI): Paid to the
Social Insurance Authority.
• Health Insurance (HI): Paid to the Health
Insurance Authority.
• Trade Union Fund: Paid to the Trade Union
and partially used within the company as per
regulations.
•Employee’s Contribution:
• Social insurance: 8% of monthly salary.
• Health insurance: 1.5% of monthly
salary.
• Unemployment insurance: 1% of
monthly salary (only for employees
working under contracts of 3 months or
more).
•Employer’s Contribution:
• Social insurance: 17.5% of monthly
salary.
• Health insurance: 3% of monthly salary.
• Unemployment insurance: 1% of
monthly salary.
 Accounting for Other Payables
Account 338
Debit Credit
• Trade union fees disbursed at units; ▪ Appropriating social Insurance, health Insurance,
• Amounts of social insurance, health insurance, unemployment insurance and trade union fees
unemployment insurance, trade union fees paid to into operating expenses or salaries of employees;
manage fund agencies of social insurance, health ▪ Amounts of social insurance given by social
insurance, unemployment insurance and trade union insurance agencies which are paid to employees
fees.

Credit balance
Accrued social insurance, health insurance and trade
union fees which have not been paid to management
agency or unspent trade union fees;

Debit balance shall reflect payment in excess of accounts payable, or sums of social insurance paid to
employees who have not yet been settled, and overspending trade union fees not being granted
additionally.

27
 EXERCISE 7
At the end of the month, a payroll statement is prepared. The total salaries payable for each
department are as follows:
- Direct production workers: 20,000,000 VND
- Workshop staff: 8,000,000 VND
- Office staff: 10,000,000 VND
Based on the payroll, prepare the entries for social, health, and unemployment insurance.
 Accounting for Loans and finance lease liabilities
Account 341
Debit Credit
• Sums paid for loans, finance lease liabilities; ▪ Sum of loans, finance lease liabilities incurred
• Sum of loans, liabilities reduced due to agreement of during the period;
the lenders, creditors; ▪ Exchange differences due to revaluation of the
balance of loan, finance lease liabilities by foreign
• Exchange differences due to revaluation of the currency at the end of period (in case exchange
balance of loan, finance lease liabilities by foreign rate of foreign currency rises against the Vietnam
currency at the end of period (in case exchange rate dong).
of foreign currency falls against the Vietnam dong).

Credit balance
Balance of remaining loans, finance lease liabilities.

29
 Method of accounting for several major transactions

(1) Loans by Vietnam dong (put into cash fund or deposited into bank), record:
Dr 111/112
Cr 341 - Loans and finance lease liabilities
(2) Loans transferred straightly to sellers for purchase of inventory, fixed assets, to pay for capital
investment, if input VAT is deductible, record:
Dr 152, 153, 156, 211, 213, 241 (purchase price excluding VAT)
Dr 133- Deductible value-added tax
Cr 341 - Loans and finance lease liabilities
(3) Payment loans by Vietnam dong or by sums received from debts of the customer, record:
Dr 341 - Loans and finance lease liabilities (3411)
Cr 111, 112, 131
Journalise the transactions: The company signs a loan contract for 1 billion VND, received via
bank deposit, with a 1-year term and an interest rate of 10% per year. Interest is paid in cash at the
beginning of each month.
SECTION 3
Presentation of
Liabilities on the
Financial Statements
 Classification of Liabilities on Financial Position
of Statement
Current Liabilities (Nợ ngắn hạn)
These are obligations expected to be settled within 12 months or within the operating cycle,
whichever is longer.
Non-Current Liabilities (Nợ dài hạn)
These are obligations expected to be settled beyond 12 months from the reporting date.

Disclosure of Liabilities in Notes to the Financial

Statements
In addition to being presented on the balance sheet, the liabilities must be disclosed in the
Notes to the Financial Statements (Thuyết minh BCTC)
SECTION 4
Financial Ratios
THE END