ACCT90004 Chap.7 Liabilities, Tax and Loan Accounting
Liabilities, Tax and Loan Accounting
Liability accounting follows obligations from initial recognition to settlement. This chapter separates GST collected and paid, payroll amounts, income tax instalments and loan principal from related expenses or cash flows. Amortising loan questions require an opening balance, interest, cash payment and principal reduction schedule.
The controlling principle is that a cash payment may contain several accounting components, so each part must be classified before the closing liability and expense are calculated.
What this chapter covers
- 01
Present obligations
- 02
GST receivable and payable
- 03
Payroll liabilities
- 04
Income tax instalments
- 05
Loan interest and principal
- 06
Amortisation schedules and settlement
Worked example · free
Split a loan payment
- 1Interest is $100,000 multiplied by 0.5%, which equals $500.
- 1Principal reduction is $2,000 minus $500, which equals $1,500.
- 1Closing loan principal is $100,000 minus $1,500, which equals $98,500.
- 1Record $500 interest expense, reduce the loan by $1,500 and credit cash by $2,000.
Key terms
- Loan principal
- The outstanding amount borrowed before interest for the period.
- Amortisation schedule
- A table separating each payment into interest and principal movements.
- GST payable
- A liability for tax collected on taxable sales, subject to eligible offsets.
- Withholding liability
- An amount deducted for remittance to the relevant authority.
Liabilities, Tax and Loan Accounting FAQ
Why is the whole loan payment not an expense?
The interest component is the cost of borrowing for the period, while principal repayment settles an existing liability. Treating both as expense would understate the loan and overstate the period's borrowing cost.
How should GST be kept separate from revenue?
Where the transaction is taxable, identify the GST component and record it in the relevant tax account rather than including it in revenue or expense. Reconcile collected and creditable amounts to determine the net position.
What is the best check on a loan schedule?
For each period, opening principal plus any capitalised amount minus principal repaid must equal closing principal. The cash payment must also equal interest plus principal reduction, subject to the precise contract terms supplied.
How do I keep pass-through amounts out of expense?
Identify amounts collected or withheld for another party and record the resulting obligation separately. Reconcile the liability until remittance. Expense reflects the entity's own consumed resources or borrowing cost, while principal settlement and pass-through remittance remove existing obligations.
Exam move
Create a liability map that separates obligations arising from purchases, employees, taxes and financing. For every cash movement, ask whether it creates an expense, settles principal, remits an amount collected for another party or combines several effects. Practise GST with prices clearly labelled as including or excluding tax, and reconcile output and input amounts before deciding the net payable or receivable.
For loans, construct schedules with columns for opening principal, interest rate, interest, payment, principal reduction and closing principal. Check each row both horizontally and vertically. Change the payment or rate in fresh examples so you cannot rely on a remembered pattern. When payroll or tax facts appear, use only the rates and rules printed in the problem or source materials rather than importing external rules.
Review mistakes by tagging the component confused with another, such as principal treated as expense. End revision with mixed journal entries that require a narrative explanation of the obligation, settlement date and effect on profit, cash and closing liabilities. Add a counterparty column to the liability map.
Supplier, employee, tax authority and lender obligations have different origins, evidence and settlement terms even when all end with a cash payment. For GST cases, derive the tax component from the price basis stated and reconcile collected amounts against eligible credits before calculating the net position. For payroll, begin with gross expense and split net cash from withholding so the credits add to the debit.
For income tax instalments, distinguish a prepayment or receivable from the eventual tax expense treatment supported by the problem. Build at least six rows of an amortisation schedule and check that every payment equals interest plus principal reduction. Recalculate the next period from the new opening principal rather than copying the prior interest.
Use a separate journal for borrowing proceeds so initial cash and liability do not leak into income. When rates or tax rules are not printed, do not import current external law into the answer; work from the provided facts. Finish each mixed question by reconciling closing liabilities to unpaid components and stating the profit effect separately from cash.
This discipline makes it harder to treat principal, withholding or collected tax as a period expense. At the close, circle every amount held for another party and verify that it remains a liability until the corresponding settlement occurs.
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