Chapter 13 - part 1: Current Liabilities

I. General Information
A. Current liabilities are those obligations whose settlement will likely require
the use of current assets.
B. From a financial analysis standpoint, current liabilities can be used to help
assess a companys liquidity.
(1) Current ratio = Current Assets/Current Liabilities
(2) Working capital = Current Assets Current Liabilities
(3) Quick ratio = (Current Assets Inventory) / Current Liabilities
II. Categories of Current Liabilities
A. Accounts payable
1) These are current liabilities owed to suppliers of goods or services that
arise in the ordinary course of business
2) Typically, due dates are within a short period of time (30 60 days)
3) Often termed trade payables.
B. Notes payable
1) A written promise to pay a specific sum of $ on a specific future date.
2) Classification of the note as short-term or long-term depends on this
payment due date -- the portion of the note that is currently due should
be classified as a current liability
3) Interest Bearing Note:
-- Record the note at face value
Cash
xxx
N/P
xxx
-- Recognize interest expense at appropriate time
Int. Exp.
xxx
Cash / Int. payable
xxx
-- Pay the principal of the note at maturity
N/P
xxx
Int. Exp.
Cash
xxx
(may also be accrued interest to remove at this time)
4) Non-Interest Bearing Note
-- The difference between the cash you receive and the cash you
pay back is interest that is implicit in the note.
-- Record the issuance of note
Cash (Present value of note)
xxx
Discount
xxx
Note Pay (face value of note)
xxx
-- Understand the meaning of the discount account
5) Classification Issues - Current maturities of long-term debt may be
reclassified if:
-- if the current maturities will be settled with non-current

C.
D.

E.

F.

assets. (e.g. bond sinking fund classified as long-term)

-- if the debt will be converted to stock
-- if the current maturities will be refinanced - must demonstrate
both the intent to refinance and the ability to refinance.
-- GENERAL RULE: Current maturities are not a current
liability if they do not require the use of current assets to satisfy
the obligation.
Dividends Payable -- these are a current liability once they are declared.
Returnable Deposits -- whether or not these are current liability depends on
the length of time between the date of the deposit and the expected time to
return the deposit
-- Journal Entry
Cash
xxx
Deposit from customer
xxx
Unearned Revenue - arised when someone pays you in advance for a good or
service.
-- Initial journal entry
Cash
xxx
Unearned Rev
xxx
-- Subsequently
Unearned Rev
xxx
Revenue
xxx
Sales tax Payable
-- Normally:
Cash (Sale amount + tax)
xxx
Sales (sale amount)
xxx
Sales Tax Payable
xxx
-- Sometimes, it can be initially recorded in sales acct.
Cash
xxx
Sales
xxx
Sales

G.

xxx

Sales Tax Payable

xxx
Property Taxes -- the property tax liability should be recorded through
monthly accruals during the period after which the tax is levied.
-- Assessment no entry
-- Monthly
Prop Tax Expense
xxx
Prop Tax Payable
xxx
-- When payment is due
Prop Tax Payable
xxx
Cash
xxx
-- Note: you could have a prepaid account if you prepay prop. taxes.
Prepaid property tax
xxx
Cash
xxx
Prop tax expense
Prepaid prop. tax

xxx
xxx

H. Income Tax Payable

I. Employee-related liabilites
1) Payroll deductions
2) Payroll taxes
3) Compensated Absences paid vacation; sick leave
-- KEY CONCEPT: the expense and the related
liability should be recognized in the year earned by the employees.
-- Record the expense in the period employee works
Wage Exp
xxx
Vacation/Sick Wages Pay
xxx
We typically use the current rate of pay and not the future rate
applicable when the vacation is taken. Why? B/C the current rate
is easy to come up with, is typically lower, and I dont want to
promise raises to employees
J. Bonus Agreements