8/9/2019 ch13p1
1/3
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 company’s 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. xxxCash / 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
8/9/2019 ch13p1
2/3
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.
C. Dividends Payable -- these are a current liability once they
are declared.
D. 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
E. Unearned Revenue - arised when someone pays you in advance
for a good or
service.
-- Initial journal entry
Cash xxxUnearned Rev xxx
-- Subsequently Unearned Rev xxx
Revenue xxx
F. 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 xxx
Sales Tax Payable xxx
G. 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 xxx
Prepaid prop. tax xxx
8/9/2019 ch13p1
3/3
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 don’t want
to
“promise” raises to employees
J. Bonus Agreements
