Current Liabilities

Key Things To Know

Key Things To Know


Liability –
Probable future payment of assets (usually cash) or services which

1) is caused by a past transaction or event
2) is a present obligation
3) requires a future payment of an asset

Current or short-term –
The company intends to pay (or is due to be paid) within one year of the balance sheet date or the operating cycle, whichever is longer

Common Current or Short-term Liabilities:

Accounts Payable:
Amounts owed to suppliers for repeat goods or services purchases on credit,
Supplier will send an invoice to be paid at a later date
Normal payment terms: 30 – 60 days
No interest charged

Line of Credit:
A pre-arranged amount a company can borrow without having to go through formal
loan procedures at the bank at the time of each borrowing

Committed: The company pays a fee to the lender for making the funds available.

Commercial Paper:
Large, credit-worthy companies borrow short-term from investors at very low interest
Typical maturity (repayment) is between 30 to 270 days

Accrued Liabilities/Expenses:
Expenses (service received) related to day to day business with customers
No invoice; however, contractually owe and not yet paid
Salaries payable, interest payable, taxes payable

Paid Future Absences (Vacation/Sick leave):
Accrue if all 4 of the following are met:

1. Obligation from services already performed by the employee
2. The benefit can be taken at a later time
3. Payment of the benefit is probable
4. The amount can be reasonably estimated

Expense in the period the employee works to earn the benefit:


Salaries & Wages Expense             $XX
           Accrued Compensation                 $XX

Advance Cash from Customer:

Unearned Revenues:
A customer pays for goods or services before the company provides
May be current or noncurrent depending on when goods or services will be provided

Refundable deposits:
Customers pay a deposit that will be refunded at a later date

Notes Payable:

Short-term Notes Payable:
A written promise to pay an amount borrowed
With interest
The principal will be repaid in 1 year or less
Periodic payments pay some principal and interest incurred during the period

Current Maturities of Long-term Debt/Notes Payable:
The amount payable within one year or the operating cycle whichever is longer

The lender can require repayment on a specified date.
Report long-term debt that is callable within one year as current

Intent to Refinance:
Report short-term notes payable as noncurrent if the company
   1) intends to refinance long-term
   2) can demonstrate the ability to refinance long-term

Contingent Liability:
An amount owed due to an event that occurred
A future event must happen in order to determine how much will be paid

Short-term or long-term depends on when the estimated amount is expected to be paid.

Examples: Lawsuits, environmental issues, debt guarantees, warranties

First: Classify the obligation based on how likely it is to occur:
Use one of three categories
GAAP did not give a definition of each category
1) Probable
2) Reasonably Possible
3) Remote

Determine a reasonable range (high and low) estimate that may be paid
Sometimes a reasonable estimate cannot be made.

Third: Based on the classification, report the following

1) Probable

Record an expense and a liability for the low end (minimum required) if can reliably estimate

Disclose the situation in the footnotes

If unable to reasonably estimate: Do not record an expense

2) Reasonably Possible

Disclose the situation in the footnotes stating the low and high estimate that might be paid

Or state that a reasonable estimate cannot be made

3) Remote –

Do nothing
Do not expense or disclose

Warranty Liabilities:
A seller’s obligation to replace goods or provide service related to defective products Usually within a set period of time

The estimated warranty expense is recorded in the same period as the sale.

   Sales this period
x % of sales historically paid for the warranty
= Warranty expense for this period

Record the warranty obligation for the calculated amount:

Warranty Expense            $XXXX
             Warranty Liability            $XXXX

Record a claim against the warranty:

Warranty Liability            $XXXX
            Cash or Inventory           $XXXX

If the company sells an extended warranty separately

Cash                                     $XX
          Unearned Revenue          $XX

 As time passes and the warranty expires

Unearned Revenue           $XX
            Revenue                          $XX

Payroll Liabilities:

Amounts accessed by the government
Amounts taken out of the employee’s check to be paid to the government

Gross Pay: the total amount the employee earns (hours worked x $ per hour or salary)

Net Pay: the amount the employee receives after payroll deductions

Employee Payroll Deductions (Withholdings)

Employee FICA tax (Social Security): 6.2% up to a set amount
Medicare tax: 1.45% of total amount earned
Income tax: depends on how much is earned & the employee’s tax rate
Voluntary Deductions: Health insurance, union dues, pension savings…

Journal entry to record:

Salary Expense *
             FICA tax payable
             Medicare tax payable
             Federal income tax payable
             Medical insurance payable
             Union dues payable
             Pension payable
             Salaries payable **

* Salary expense is the total the employee earns
** Salaries payable is the net check to the employee after deductions

Employer Payroll Taxes:

Employers must pay FICA/Social Security tax and Medicare tax for the same amount the employee pays – 6.2% and 1.45%

Employers are required to pay unemployment taxes so that laid off workers will be able to receive unemployment benefits.

Must be paid to the state (SUTA) and to the federal government (FUTA).

State: 3% to 5% of the first $7,000 earned, based on history
Federal: 6% of first $7,000 earned

Journal entry to record employer’s tax liability

Payroll tax expense **
             FICA/SS tax payable
             Medicare tax payable
             SUTA payable
             FUTA payable

** Payroll tax expense is the total of all the other payables