Chapter 13
Current Liabilities
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
In this chapter…
Balance Sheet
Current Assets
Cash
Current Liabilities
Chapter
10000
Accounts Payable 13
5000
Accounts Receivable
20000
Wages Payable
11
25000
Notes Receivable
15000
Utilities Payable
13
2000
Marketable Securities
25000 Long-Term Debt
Inventory
120000
Capital Assets
Notes Payable
20000
Bonds Payable
600000
Equipment
250000 Owner’s Equity
Buildings
500000
Goodwill
Total Assets
60000
Common Stock
300000
Retained Earnings
48000
1000000 Total Liabilities + OE
1000000
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Liabilities
• Liability – a future payment of assets or services that a
company is presently obligated to make as a result of a past
transaction or event.
• Current Liabilities – aka short-term liabilities, are
obligations expected to be settled within one year of the
balance sheet date or within the company’s next operating
cycle, which ever is longer
– Examples: Accounts payable, wages payable, unearned revenues,
current portion of long-term debt
• Long-term Liabilities – obligations expected to be paid in
over one year or longer than one operating cycle
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Current Portion of Long-term Debt
• The current portion of long-term debt is the part of longterm debt that is due within the longer of one year of the
balance sheet date or the next operating cycle.
– It is reported as a current liability
– The rest of the debt is reported as Long-term Liability
– Note that the amounts shown as both current and long-term
liabilities are principal amounts only
– Interest is recorded as interest payable for any interest that has
accrued to the point when statements are drawn up.
• Demand loans are loans that could be called by the creditor
at any time
– They are shown as Current Liabilities on the Balance Sheet
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Determinable Liabilities
• To account for a liability, the accountant needs to know
– Who to pay
– When to pay
– How much to pay
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Types of Current Liabilities
• Trade Accounts Payable or Accounts Payable
– These are amounts owed to suppliers from whom the company
purchased raw materials or operating supplies
– Example, our company purchases lumber from Beaver Lumber on
net 30 terms
Date
Account Titles and explanation
Jan 31
Lumber (asset)
PR
Debit
Credit
5000
Accounts Payable
– Since the payment is due in 30 days, it is a current liability
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
5000
Types of Current Liabilities
• Payroll Liabilities
– As we saw in Chapter 11, payroll liabilities are amounts owing to
employees for services already performed.
– These may include (or will be broken out as) income taxes
Payable, CPP Payable, EI Payable
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Types of Current Liabilities
• Provincial Sales Tax (PST) and Goods and Services Tax
(GST) Payable
Date
– PST is collected on a sale to a final customer. If a business is a
middle part of the distribution channel, no PST is collected
– Ex (p 659): Best Furniture of Maidstone, SK sells a couch (with
cost of 12000) for 16000, with 7% PST
Account Titles and explanation
PR
Debit
Credit
Aug 1
Cash
17120
Sales Revenue
16000
PST Payable
1120
COGS
12000
Inventory
12000
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Types of Current Liabilities
• When Best Furniture remits the PST it collected, the
following entry is made:
Date
Account Titles and explanation
Jan 31
PST Payable
PR
Debit
Credit
1120
Cash
1120
– If there is any balance in the PST Payable account at the time the
Balance Sheet is prepared, then it is showed as a current liability
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Types of Current Liabilities
• GST – GST must be collected and paid on almost every
transaction
– GST collected from sales goes into a GST Payable account. GST
paid on purchases goes into a GST Receivable account
– When the business submits its GST report, these two accounts are
netted out to determine if the business must pay or can receive a
GST refund.
– Example, for Inventory purchase
Date
Account Titles and explanation
PR
Jul 11
Inventory
1000
GST Receivable
50
Cash
Debit
Credit
1050
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Types of Current Liabilities
• For the sale of assets
Date
Account Titles and explanation
Aug 1
Cash
PR
Debit
Credit
1575
Sales Revenue
1500
GST Payable
75
COGS
1000
Inventory
1000
• The GST T-account looks like:
GST Rec/Payable
Jul 11
50
Aug 1
75
Bal.
25
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Types of Current Liabilities
• So the GST balance is such that there is an amount due to
the Receiver General. The journal entry is then:
Date
Account Titles and explanation
Sep 1
GST Payable
PR
Debit
Credit
75
GST Receivable
50
Cash
25
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Types of Current Liabilities
• Unearned Revenues
– As we have seen before, Unearned Revenues are amounts that have
been received from customers for future goods or services
– Until the goods or services are provided, the amount is shown as a
current liability
– A good example are airplane tickets and entertainment tickets. They
are purchased in advance of the company providing the service
Date
Account Titles and explanation
Jan 3
Cash
PR
Debit
2000
Advanced Ticket Sales
Jan 31
Credit
Advanced Ticket Sales
Sales Revenue
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
2000
2000
2000
Mid-Chapter Demonstration Problem
• Try the Mid-Chapter Demo problem
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Short-term Notes Payable
• A short-term note payable is a promise to pay a specified
amount on a date within one year of the balance sheet date.
– Sometimes a company will replace an account payable amount due
(which does not require interest paid) with a note payable, which does
require interest paid.
– Interest owed = Principal x Annual Interest Rate x No. days/365
– If a balance sheet is prepared some time after the note payable is
agreed to, but before paid, then the balance sheet will show the Notes
Payable as well as a separate line for Interest Payable (Exh 13.9)
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Short-term Notes Payable
• Lets say we take a 1 yr loan from the bank, as a Note Payable
Date
Account Titles and explanation
Jul 1, 08
Cash
PR
Debit
Credit
20000
Notes Payable
20000
• Then, when a balance sheet is prepared on Dec 31, interest
must be shown and interest expense accrued
– Assuming 5% annual interest, Interest = 20000 x .05 x 180/365
Date
Account Titles and explanation
PR
Dec 31, 08 Interest Expense
Interest Payable
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Debit
Credit
500
500
Short-term Notes Payable
• When the Note is finally paid off, interest is calculated
again and paid
– Interest for the remaining ½ year = 20000 x .05 x ½ = 500
Date
Account Titles and explanation
Jul 1, 09
Interest Expense
PR
Debit
Credit
500
Interest Payable
500
– To pay off the Note:
Date
Account Titles and explanation
PR
Jul 1, 09
Interest Payable
1000
Note Payable
20000
Cash
Debit
Credit
21000
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Another Example
• This time, we get a $15000 Note Payable at 4% due July 1
Date
Account Titles and explanation
Nov 1, 08
Cash
PR
Debit
Credit
15000
Notes Payable
15000
• Then, when a balance sheet is prepared on Dec 31, interest
must be shown and interest expense accrued
– Interest = 15000 x .04 x (29+31)/365 = 98.63
Date
Account Titles and explanation
PR
Dec 31, 08 Interest Expense
Interest Payable
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Debit
Credit
98.63
98.63
Short-term Notes Payable
• When the Note is finally paid off, interest is calculated for the
portion after the year end and paid
– Interest for the remaining = 15000 x .04 x (31+28+31+30+31+30+1)/365
Date
Account Titles and explanation
Jul 1, 09
Interest Expense
PR
Debit
Credit
299.18
Interest Payable
299.18
– To pay off the Note, we pay all the interest (98.63+299.18) = 397.81
Date
Account Titles and explanation
PR
Jul 1, 09
Interest Payable
397.81
Note Payable
15000
Cash
Debit
Credit
15397.81
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Estimated Liabilities
• Estimated Liability - a liability that is known, but the exact
amount and time of when it is paid may not be known
– Examples are Warrantees and Taxes
• Warranty – an obligation of a seller to pay for replacing or
repairing the product if and when it fails
– To comply with the matching principle, the seller must allocate
some warranty expense in the period of the product’s sale
– When calculating warranty, use the costs that the company must
bear to set aside warranty
• A company doesn’t charge itself selling price in warranty claims
Date
Account Titles and explanation
Jul 7, 06
Warranty Expense
PR
Warranty Payable
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Debit
Credit
200
200
Estimated Liabilities
• The exact amount to record as a warranty expense and warranty
liability must be estimated, usually based on past experience.
– It might be a percentage of the product’s sale price
• When the customer returns for repair, the liability is used to
cover some of the cash outlay required to honour the warranty.
– Lets say the product is on warranty for parts only and labour is to be paid
by the customer
Date
Account Titles and explanation
PR
Debit
Oct 7
Warranty Payable
100
Cash
200
Credit
Inventory
100
Wages Payable
200
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD
Estimated Liabilities
• Income Tax Liabilities – Income taxes are a liability until
paid to the government
• The liability is created when the income is earned
Date
Account Titles and explanation
Jul 7, 06
Income Tax Expense
PR
Debit
Credit
20000
Income Tax Payable
20000
• When the tax installment is actually paid
Date
Account Titles and explanation
Jul 7, 06
Income Tax Payable
PR
Cash
Debit
Credit
20000
20000
Financial Accounting
Dave Ludwick, P.Eng, MBA, PMP, PhD