Current Liabilities

Key Things To Know

Introduction to Accounting

Key Things To Know

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

1) occurs from a past transaction or event
2) is a present obligation
3) is a future payment 

Current or short term – 

means it will 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 goods or services purchased on credit, normally 30 days, no interest charged

Sales Tax Payable:

A tax levied on retail sales.  
The business must charge this and collect the money and then pay it to the state or city
Each state/city sets its own %.  

This is not a revenue or an expense to the business. 
They collect the cash and have an obligation to pass it on to the city/state.

Journal entry for sales tax collection and payable:

Cash                                                 $XXXX
       Sales revenue                                 $XXXX
       Sales Tax Payable                              $ XX

Part of what is collected is revenue and part is owed to city/state. 

Unearned Revenues:  

Occurs when the company collects money from a customer before the company provides the goods or services

The company owes the goods or services.

This is normally current; however, can also be noncurrent.

Short Term Notes Payable:   

A written promise to pay an amount borrowed, with interest 

Short term means the principle will be repaid in < 1 year

Notes payable typically have monthly periodic payments

Payroll Liabilities:

Amounts accessed to the business by the government and amounts taken out of the employee’s check that must be paid to the government for the employee:

Gross Pay – the total amount the employee earns (hrs worked x $ per hr)
Net Pay – the amount the employee receives after deductions are taken

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 for the employee’s paycheck:

Salary Expense *
       FICA tax payable
       Medicare tax payable
       Federal income tax payable
       Medical insurance payable
       Union dues payable
       Pension/401K payable
       Salaries payable **

* Salary expense is what the employee earns (hrs. x rate per hr.)

** Salaries payable is the 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.  

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

State:  usually 1% to 5.4% of the first $7,000 earned, based on history
Federal:   usually .8% of first $7,000 earned, considering state was paid

Journal entry for recording employer’s taxes to be paid

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 that are calculated based on the given % x earnings

Warranty Liabilities:  

The seller’s obligation to replace goods or provide service to defective products within a set period of time

Sometimes extra is paid for the warranty and sometimes the warranty comes with the product.

The warranty expense must be recorded in the same period as the sale.  

We do not know the exact amount that will occur in the future, so we must estimate.

Sales this period
x % of warranty historically occurs
= warranty expense for this period

Record the warranty obligation for the calculated amount:

Warranty Expense                       $X,XXX
Warranty liability                         $X,XXX

Contingent Liabilities:  

An obligation that may occur, dependant on a future event to happen, in order for you to know how much will be paid to who.

Contingent liabilities may be short-term or long-term depending on when the estimated amount is expected to be paid.

Examples:  Lawsuits, environmental cleanups, debt guarantees

First:  Classify the obligation based on how likely it is to occur:

FASB did not give a definition of each category.

1) Probable
2) Reasonably Possible
3) Remote

Second:  Determine a high low range that may be paid for the obligation, if possible.  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 of the estimated amount if you can estimate a range. 

Disclose the situation in the footnotes

If you cannot reasonably estimate a range, no expense is recorded.

2)  Reasonable Possible 

Disclose the situation in the footnotes stating the low and high estimate that might be paid or state that you can not reasonably estimate the loss

3)  Remote  

Do nothing, do not expense or disclose