Let's look at a few examples of current liabilities,
and we'll take a look at some of the journal entries that
you would normally enter to put them on the books.
These are accruing entries that are usually prepared at
the end of the year as you're getting ready to prepare the financial statements.
So, this is basic accrual accounting.
This is the heart of double entry accounting.
Let's look at one here for supplies.
You have a supplies inventory that you purchased in December,
you took delivery, you have the bill, you haven't paid it yet.
It's an account payable that's going to be
a current liability and will be classified as such in the financial statement.
Customer Advances.
Now this one is going to change with
the implementation of a new revenue recognition standard,
because these are now going to be considered part of contract assets and liabilities.
There's a net contract in an asset liability.
There's specific disclosure requirements that are going to be
required when you have advances from customers because,
again as I was describing earlier,
if I've been paid by the customer but I haven't performed yet,
I have an obligation to perform it sometime in
the future which may be a current liability or a performance obligation.
But for now, we're going to call it a refundable deposit.
There's non-refundable deposits, too,
which are really, the accounting form is not greatly dissimilar.
But there are going to be classified as a current liability in the financial statements.
Accrued Expenses.
Okay, so we had a bill for the supplies that were delivered.
What if I don't have a bill yet?
I'm going to estimate what the bill is going to be.
I can look at previous experience.
I may be able to get a reading from the utility company.
I may even be able to look at a subsequent bill and
go back in time and prepare an estimate based upon what it would have been,
based by the number of days in the period, for example.
But I'm going to make an accrual for that.
So, utility expenses will be debited and then I'm going to credit
an accrued expenses that's a current liability.
A short-term note. When I received the cash for the note,
I'm going to classify the note payable.
If the note payable is due anytime within
the next year and note payable's generally are due within a short period of time,
it's going to be classified as a credit liability in the balance sheet.
There's usually no re-adjusting entry required for the short-term note,
but there maybe for the current portion of debt.
So in this case,
Primo industries has a three-year note payable at eight percent interest.
It falls due in October.
I'm going to take the 6,155.
Because it's due in the coming year,
I'm going to classify it as a current liability.
Now as we talked about before,
if I've already arranged to refinance it on
a long-term basis before the financial statements are issued,
I might be able to classify this as a long-term,
subject to those conditions we talked about that there's
no violation of any provision and that the lender is fully capable of making the loan.
But, absent that evidence of refinancing
prior to issuance of the financial statements or when they're available for issuance,
this will be short-term or a current liability.
Here's one we didn't talk about before, what about dividends?
Well, if you declare a dividend late in the year to be payable in January,
usually, a dividend is not a liability until it's declared.
But as soon as it's declared,
if it hasn't been paid yet,
and it's payable in the next period again,
I'll debit retained earnings and credit a dividend as payable.
Notice it's not an expense,
but the payable will be a current liability.
Also at the end of the year,
I'm going to accrue whatever payroll has been earned.
The employees have already done the work.
I'm going to accrue it and I'm going to account for
it up to the point at the end of the year,
that they've done the work but haven't been paid for it yet.
One of the factors that you're going to look at here, too, is bonuses.
Bonuses are accrued as well even if they haven't been declared yet.
If you have a formula, for example,
if the company has a bonus formula,
you would apply that formula to the bonus and estimate whether it's been accrued or not.
This would be the case if there is a bonus,
for example, if a target is reached on net income.
If that target is probable or has been reached,
you would accrue a bonus for it.
So what's this going to look like in the financial statements?
Somewhere in the notes,
you're going to have a section of
current liabilities and it's going to work just like this.
You're going to list everything that you've got,
that's expected to require the use of
current assets in the coming period or operating cycle,
whichever is longer, and total it up.
Now here's an odd thing.
You really only have to present the total if you present a classified balance sheet.
But there's no requirement to present a classified balance sheet.
You could present the assets and liabilities just in
order of liquidity or maturity for debt.
But if you do present a classified balance sheet,
or statement of financial position,
the more modern term, then you need to prepare a subtotal on your account.
Now the SCC has its own rules under regulation at SAC II.
If you're a public client,
you're going to need to take a look at those two and see what you need to do.
So, this has been some review of some fundamental double entry bookkeeping.
It's accruals, it's recording transactions.
Recording invoices are received.
It's looking at your debt and making
sure that it's properly classified as current and long-term.
It's a little bit of of year-end housekeeping and cleaning, but it's important.
It's important to investors to know what those current liabilities are.
It's important to management to know what current liabilities are,
in terms of preparing their operating plan,
their cash flow budget.
They're assessing the liquidity of the firm and their ability to meet their commitments.
So this is a relatively simple area of accounting,
but it's an important one.
John HeppClinical Assistant Professor of Accountancy
