WEYGANDT . KIESO . KIMMEL . TRENHOLM . KINNEAR . BARLOW . ATKINS
PRINCIPLES OF
FINANCIAL ACCOUNTING
CANADIAN EDITION
Chapter 10
Current Liabilities
Prepared by:
Debbie Musil
Kwantlen Polytechnic University
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Current Liabilities
• Determinable (certain) current liabilities
– Operating line of credit and bank overdraft
– Short-term notes payable
– Current maturities of long-term debt
• Uncertain liabilities
– Estimated liabilities
– Contingencies
• Financial statement presentation
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Chapter 10: Current Liabilities
Study Objectives
1. Account for determinable or certain
current liabilities.
2. Account for estimated liabilities.
3. Account for contingencies.
4. Prepare the current liabilities section
of the balance sheet.
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Determinable (Certain)
Current Liabilities
• Obligations that are expected to be
settled:
– Within one year of the balance sheet
date, or
– Within normal operating cycle
• Requires existence of a present
obligation
• Determinable liabilities have known
amount, payee, due date
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Operating Line of Credit
• Pre-authorized borrowing
– Allows the company to borrow up to a preset
limit when needed
• May require collateral (security)
– Such as current assets, investments, or property,
plant and equipment
• Used on a short-term basis
• Negative (overdrawn) cash balance is called
bank indebtedness, bank overdraft or bank
advances
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Short-Term Notes Payable
• Obligations in the form of written promissory
notes
• Usually require the borrower to pay interest
• Used instead of accounts payable
– Gives lender proof of obligation in case legal action
is needed to collect
• Issued for varying periods
– If due within one year of the balance sheet date,
classified as current liabilities
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Short-Term Notes Payable 2
• Interest is recorded in the period the loan is
outstanding:
• At maturity, the face value of the note plus interest
must be repaid:
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Current Maturities of LongTerm Debt
• The portion of long-term debt that is
due within the current year
– Amount not due within current year is
disclosed as a long-term liability
• No adjusting entry is required to
recognize the current portion of longterm debt
– The proper classification is made when
the balance sheet is prepared
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Chapter 10: Current Liabilities
Study Objectives
1. Account for determinable or certain
current liabilities.
2. Account for estimated liabilities.
3. Account for contingencies.
4. Prepare the current liabilities section
of the balance sheet.
Copyright John Wiley & Sons Canada, Ltd.
9
Estimated Liabilities
• Obligation exists but the amount and
timing is uncertain
– We owe someone, but not sure how
much, when or even who
• Liability is recognized when:
– Settlement of the liability is likely, and
– Amount of the liability can be reasonable
estimated
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Product Warranties
• Promises made by seller to buyer to repair
or replace a product if it is defective or does
not perform as intended
• Warranties will lead to future costs for
replacement or repair of defective units
• Cost of warranty is estimated and accrued
based on prior experience
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Customer Loyalty Programs
and Gift Cards
• Result in an estimated liability:
– Not known if or when rewards will be
redeemed
• If redemptions are likely, and can be
estimated based on past experience:
– Record estimated liability as a reduction in
revenue (not an expense)
– Sales discount is a contra revenue account
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Chapter 10: Current Liabilities
Study Objectives
1. Account for determinable or certain
current liabilities.
2. Account for estimated liabilities.
3. Account for contingencies.
4. Prepare the current liabilities section
of the balance sheet.
Copyright John Wiley & Sons Canada, Ltd.
13
Contingent Liabilities (or
Provisions)
• Record liability if both conditions are met:
– It is likely (or probable (“more likely than not”)
under IFRS) that an obligation exists, and
– Amount can be reasonably estimated
• If contingent loss is likely, but cannot be
reasonably estimated:
– No liability is recorded
– Disclosed in the notes to the statements
• If contingency is unlikely:
– Still disclosed if event is substantial, otherwise
not disclosed
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Chapter 10: Current Liabilities
Study Objectives
1. Account for determinable or certain
current liabilities.
2. Account for estimated liabilities.
3. Account for contingencies.
4. Prepare the current liabilities section
of the balance sheet.
Copyright John Wiley & Sons Canada, Ltd.
15
Financial Statement
Presentation
• Current liabilities are the first category reported
in the liabilities section of the balance sheet
• Each type of current liability is listed separately
• Listed in order of liquidity, usually by maturity
date
– Also common to show bank loans, notes payable and
accounts payable first regardless of size
• Terms of operating lines of credit, notes
payable and other information are disclosed in
the notes
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by the use of these programs or from the use of the
information contained herein.
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