Overview
This lecture covers the identification, measurement, reporting, and classification of current liabilities and key issues with contingencies in financial accounting.
Nature and Definition of Liabilities
- A liability is a present obligation from a past event, with a probable future outflow of resources.
- Liabilities are recorded only if the obligation is probable and measurable.
Classification of Current Liabilities
- Current liabilities require the use of current assets or the creation of other current liabilities within the operating cycle or one year.
- The cutoff for classification is normally one year unless the company’s operating cycle is longer.
Types and Valuation of Current Liabilities
- Accounts Payable: Amounts owed to suppliers, usually due within 30 days, may include early payment discounts.
- Notes Payable: Written promises to pay; can be interest-bearing (explicit rate) or zero-interest (discounted).
- For interest-bearing notes, accrue interest over time; for discounted notes, amortize the discount as interest expense.
- Dividends Payable: Amounts owed to shareholders once declared; undeclared cumulative preferred dividends are disclosed, not recorded.
- Deposits and Unearned Revenue: Cash received before performance is a liability until the obligation is fulfilled.
Sales Taxes and Payroll Liabilities
- Sales tax collected is a liability until remitted to authorities.
- Income taxes payable represents owed but unpaid taxes; estimated payments offset this.
- Payroll liabilities include wages, deductions (taxes, insurance, dues), and employer payroll taxes (FICA, Medicare, FUTA, SUTA).
Compensated Absences and Bonuses
- Accrue liability for vacation if benefits vest/accumulate and are probable and estimable.
- Sick leave is accrued only if probable and estimable; bonuses are expensed when earned and recorded as liabilities until paid.
Classification Issues with Short-Term Debt
- Short-term obligations refinanced on a long-term basis before the balance sheet date may be classified as long-term.
- Refinancing completed after the balance sheet date, but before financial statements are issued, still requires short-term classification.
Key Terms & Definitions
- Liability — Present obligation from a past event, expected to result in an outflow of resources.
- Current Liability — Obligation due within one year or an operating cycle.
- Notes Payable — Written promise to pay money at a future date, either interest-bearing or discounted.
- Unearned Revenue — Cash received before earning the revenue, recorded as a liability.
- Sales Tax Payable — Tax collected from customers, owed to the government.
- FICA Tax — Combined Social Security and Medicare taxes, paid by both employer and employee.
- Compensated Absences — Employee benefits for time off, accrued if vested or accumulated.
Action Items / Next Steps
- Review examples of journal entries for current liabilities.
- Prepare to discuss gain and loss contingencies and presentation in the second part of the chapter.