Accounting Accounting PrinciplesPrinciplesSecond Canadian EditionSecond Canadian Edition

Prepared by: Carole Bowman, Sheridan College

Revised by:

Carolyn Doering, Huron Heights SS

Weygandt · Kieso · Kimmel · Trenholm

CURRENT LIABILITIESCURRENT LIABILITIES

CHAPTERCHAPTER

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A current liability is a debt that can reasonably be expected to be paid

1. from existing current assets or in the creation of other

current liabilities and

2. within one year or the operating cycle, whichever is longer.

ACCOUNTING FOR ACCOUNTING FOR CURRENT LIABILITIESCURRENT LIABILITIES

ACCOUNTING FOR CURRENT ACCOUNTING FOR CURRENT LIABILITIESLIABILITIES

Types of liabilities1) Definitely determinable (known

amount, payee, and due date)2) Estimated (estimate the amount or

timing)3) Contingent (potential liabilities that

depend on a future event such as a pending lawsuit)

Definitely determinable current liabilities include:

1. Operating line of credit2. Accounts and notes payable3. Sales tax payable4. Payroll and employee benefits5. Unearned revenues6. Current maturities of

long-term debt

ACCOUNTING FOR ACCOUNTING FOR CURRENT LIABILITIESCURRENT LIABILITIES

ACCOUNTING FOR ACCOUNTING FOR CURRENT LIABILITIESCURRENT LIABILITIES

OPERATING LINE OF CREDITOPERATING LINE OF CREDITOPERATING LINE OF CREDITOPERATING LINE OF CREDIT

A pre-authorized demand loan, allowing the company to write cheques up to a preset limit when needed.

Helps manage temporary cash shortfalls Security called collateral is required (usually a

companies assets) Disclosed by footnote and by reporting

any resulting bank overdraft as a current liability.

Notes Payable are obligations in the form of written promissory notes that usually require the borrower to pay interest.

Notes payable may be used instead of accounts payable because it supplies documentation of the obligation in case legal remedies are needed to collect the debt.

Notes due for payment within one year of the balance sheet date are usually classified as current liabilities.

NOTES PAYABLENOTES PAYABLENOTES PAYABLENOTES PAYABLE

NOTES PAYABLE EXAMPLENOTES PAYABLE EXAMPLE

Company B agrees to lend $100,000 to us on March 1 for 4 month note payable at 6% interest (adjusting entries are completed each quarter)Mar 1 Cash 100,000

Note Payable 100,000To record issue of note payable

Mar 31 Interest Expense 500Interest Payable 500

To record interest for one month (end of the accounting quarter)

June 30 Interest Expense 1,500Interest Payable 1,500

To accrue interest for April, May and June (end of the quarter)

July 1 Note Payable 100,000Interest Payable 2,000

Cash 102,000To record payment to Company B and accrued interest

SALES TAXES PAYABLE SALES TAXES PAYABLE SALES TAXES PAYABLE SALES TAXES PAYABLE Sales tax is expressed as a stated percentage of

the sales price of goods sold to customers by a retailer.

Sales tax includes the goods and service tax (GST), provincial sales tax (PST) or harmonized sales taxes (GST and PST combined).

The retailer (or selling company) collects the tax from the customer when the sale occurs, and periodically (usually monthly) remits the collections to the government.

Salaries or wages payable represent the amounts owed to employees for a pay period.

Payroll withholdings include federal and provincial income taxes, Canada Pension Plan (CPP) contributions, and employment insurance (EI) premiums.

Employees may also voluntarily authorize withholdings for charity, retirement, medical, or other purposes.

Payroll withholdings are remitted to governmental taxing authorities.

PAYROLL AND EMPLOYEE BENEFITSPAYROLL AND EMPLOYEE BENEFITSPAYROLL AND EMPLOYEE BENEFITSPAYROLL AND EMPLOYEE BENEFITS

PAYROLL EXAMPLEPAYROLL EXAMPLEMar 7 Salaries and Wages Expense 100,000

CPP Payable 3,870EI Payable 2,250Income Taxes Payable 30,000United Way Payable 2,445Union Dues Payable 1,435Salaries and Wages Payable 60,000

To record payroll and deductions

There would be other JE’s to record: the actual payment to employees the employers share of payroll costs-EI, CPP, WSIB to remit the payables

Unearned Revenues (advances from customers) occur when a company receives cash before a service is rendered.

Examples are when an airline sells a ticket for future flights or when a lawyer receives legal fees before work is done.

Sept 6 Cash 200,000Unearned Hockey Ticket Revenue 200,000

To record sale of 1,000 season tickets

Sept 25 Unearned Hockey Ticket Revenue 8,000Hockey Ticket Revenue 8,000

To record hockey ticket revenue earned

UNEARNED REVENUES UNEARNED REVENUES UNEARNED REVENUES UNEARNED REVENUES

CURRENT MATURITIES OF CURRENT MATURITIES OF LONG-TERM DEBTLONG-TERM DEBT

CURRENT MATURITIES OF CURRENT MATURITIES OF LONG-TERM DEBTLONG-TERM DEBT

Another item classified as a current liability is current maturities of long-term debt.

For example, part of a 5 year note payable must be paid each year. The amount due that year should be recorded as a current liability.

Current maturities of long-term debt are often identified on the balance sheet as long-term debt due within one year.

ESTIMATED LIABILTIESESTIMATED LIABILTIESESTIMATED LIABILTIESESTIMATED LIABILTIES

Obligation that exists but for which the amount and timing is uncertain.

However, the company can reasonably estimate the liability.

Examples include property taxes and warranty liabilities (to be discussed).

Other examples include vacation pay and pensions.

PROPERTY TAXESPROPERTY TAXESPROPERTY TAXESPROPERTY TAXES

Property taxes are accrued monthly based on the prior year’s tax bill.

When the property tax bill for the current year is received, the company will adjust its monthly expense for the remainder of the year.

PROPERTY TAX EXAMPLEPROPERTY TAX EXAMPLE Tantramar Inc. had property tax of $5520 last year. For January and February of

this year they do not know what the tax will be, so their calculation is based on last year’s assessment (ie. an estimated liablity)

Jan 31 Property Tax Expense (5520/12) 460Property Tax Payable 460

To accrue property tax payable (same for Feb.)

The assessment arrives in March for $6000, payable on May 31

Mar 31 Property Tax Expense (6000-920)/10 508Property Tax Payable 508

To accrue property tax payable (repeat for April)

May 31 Property Tax Payable (460x2 +508x2) 1,936Property Tax Expense 508Prepaid Property Tax (508x7) 3,556

Cash 6,000

To pay property tax

June 30 Property Tax Expense 508Prepaid Property Tax 508

To record property tax expense (repeat at the end of July to December)

PRODUCT WARRANTIESPRODUCT WARRANTIESPRODUCT WARRANTIESPRODUCT WARRANTIES

Warranty contracts may lead to future costs for replacement or repair of defective units.

Using prior experience with the product, the company estimates what the cost of servicing the warranty will be.

Estimated warranty costs are accrued with a debit to warranty expense and a credit to estimated warranty liability.

CONTINGENT LIABILITIESCONTINGENT LIABILITIESCONTINGENT LIABILITIESCONTINGENT LIABILITIES

Contingent liabilities exist when there is uncertainty about the outcome.

Contingencies are accrued by a debit to an expense account and a credit to a liability account if both of the following conditions are met:1. The contingency is likely, and2. The amount of the contingency can be reasonably estimated.

They should be disclosed in the notes to the financial statements.

FINANCIAL STATEMENT FINANCIAL STATEMENT PRESENTATIONPRESENTATION

FINANCIAL STATEMENT FINANCIAL STATEMENT PRESENTATIONPRESENTATION

Each major type of current liability is listed separately.

Often list bank loans, notes payable, and accounts payable first, then other liabilities.

COMINCO LTD.

Current liabilities (Millions)Bank loans and notes payable $ 5Accounts payable and accrued liabilities 230Income and resource taxes 36Long-term debt due within one year 30

$301

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