Explore BrainMass

Current Liabilities

Current liabilities are obligations on a firms cash or other assets that are expected to become due within a year (or within the operating cycle, if it is longer than a year). FASB ASC defined current liabilities as liabilities that will be settled with existing current assets. This is the most important distinguishing feature between current and long-term liabilities - the fact that current liabilities necessarily place a demand on the business's current assets. On the other hand, long-term liabilities that will be settled in the future generally do not result in a claim against the business's existing current assets - this is why the two types of liabilities are categorized differently on the balance sheet

Measuring Current Liabilities

Current liabilties are usually reported based on their value at maturity. This accounting treatment is seen as appropriate because the liabilities are expected to be settled in the short-term. As result, the difference between their amortized cost (if their value at maturity was discounted to present value) and their value at maturity is usually immaterial. This treatment means that current liabilities tend to be slightly overstated, but by an amount that is not seen as material. 

Types of Current Liabilities

Current liabilities are often distinguished between financial and non-financial liabilities. Financial liabilities are liabilities that arise from a contractual obligation to either (i) deliver cash of other financial assets to another party at some time in the future or (ii) to exchange financial instruments with another party under conditions that are potentially unfavourable. All other liabilities are classified as non-financial liabilities. Most current liabilities are financial in nature, including accounts such as accounts payable and payroll liabilities. Income tax, technicially, is not a financial liability. Even though it requires the delivery of cash to a third party in the future, the obligation arises from government legislation and not a contract - which is a requirement in the definition of a financial asset. 

Contra Liabilities

Liability accounts have a normal credit balance. Contra-liability accounts, on the other hand, have a normal debit balance. These accounts are used to reduce the carrying amount of a liability without obscuring its historical cost on the balance sheet. Examples of contra liability accounts include 'Discount on Notes Payable' and 'Discount on Bonds Payable'.

Categories within Current Liabilities

Accounts Payable

Postings: 2

Accounts payable or trade accounts receivables are amounts owed to others for goods, supplies or services purchased on good faith credit.

Payroll Liabilities

Postings: 1

Employee-related liabilities include salaries or wages payable as well as related liabilities such as payroll deductions, payroll taxes, compensated absences and earned bonuses.

Bank Indebtedness

Postings: 1

Bank indebtedness for operating purposes is a major component of most company's current cash position. This is because it is easier to have an agreement with a bank for a line of credit or revolving credit facility instead of having to negotiate a new loan every time short-term financing is needed.

Interest Payable

Postings: 0

Interest payable is a current liability that reports the amount of interest expense that has accrued over the period but has not yet come due or has not yet been paid. Bonds payable, mortgage payable, long-term notes payable, and other long-term indeptedness that matures within twelve months from the balance sheet date should be reported as a current liability.

Short-Term Debt Expected to Be Refinanced

Postings: 0

In the past, short-term obligations that were expected to be refinanced on a long-term basis were not included in current liabilities. Today, if certain criteria is met this type of obligation is to be excluded from current liabilities:

Dividends Payable

Postings: 0

Cash dividends are typically paid within one year of declaration (usually within three-months). As a result, these dividends, once declared, should be included on the balance sheet as a current liability.

Rents and Royalties Payable

Postings: 0

Rent and royalty expenses may arise from a contractual agreement to remit a proportion of sales revenue or a fee based on the quantity of a product produced. These expenses, when accrued, also represent a liability to the company, usually a current liability.

Customer Deposits

Postings: 1

Returnable customer deposits are a seperate liability. Customer deposits that will be credited towards a customers' accounts payable are considered unearned revenue.

Income Taxes Payable

Postings: 12

Income taxes are an accrued expense based on the amount of the companies net income. When the expense accrues, a corresponding liability is created.

Sales Taxes Payable

Postings: 0

Sales tax is levied by the government by the sale or lease of certain goods or services. It is collected by the seller from customers and must be remitted to the appropriate government. When it is collected, sales taxes payable are a current liability.

Unearned Revenue

Postings: 0

Unearned revenue is a liability account that increases when customers pay in advance of delivery of goods or services.

Accrued Expenses

Postings: 1

Accrued expenses are obligations that a company has incurred but have not yet become due.

Current Maturities of Long-Term Debt

Postings: 0

The principal amount of long-term debt that is expected to be discharged with the use of current assets should be reported as a current liability.

Current and long-term liability: rents and security deposit

On January 4, 2004, Frye Co. leased a building to Cole Corp. for a ten-year term at an annual rental of $120,000. At inception of the lease, Frye received $480,000 covering the first two years' rent of $240,000 and a security deposit of $240,000. This deposit will not be returned to Cole upon expiration of the lease but will be