Accounting: The Language of Business - Vol. 2 (Intermediate: Part 66)

Fashion is not just about what we wear, but...fashion is also a business. It is an art, it's a career that involves science, engineering, accounting and so much more. People can learn about the math behind Charles James' designs, and think, 'Maybe I should pay closer attention to geometry this semester'

Michelle Obama

Statements of Financial Position and Cash Flows and the Annual Report (Part D)

by

Charles Lamson

Liabilities

Liabilities are generally classified on the balance sheet as either current or noncurrent. We discuss each next.

Current Liabilities.   Current liabilities are obligations that the firm expects to liquidate through the use of current assets or the creation of other current liabilities. Current liabilities will typically be paid within one year or operating cycle, whichever is longer. Current liabilities commonly include:

• Accounts payable.

• Short-term notes payable.

• Current maturities of long-term debt.

• Accrued liabilities.

• Unearned revenues.

Accounts payable (also called trade payables) are obligations due to suppliers of goods or services incurred in the normal course of business operations. There is no formal, written agreement for an accounts payable. If a formal agreement exists, then the payable is classified as a note payable. If customers pay on time, there is no interest on accounts payable. Accounts payable are classified as current liabilities because they are generally due within 30 to 60 days.

Short-term notes payable are formal written promises to pay cash at a fixed maturity date in the future. The maturity date is within the next year or operating cycle, if longer. Notes payable will usually carry a fixed rate of interest but may have an interest rate of zero. We will discuss these notes payable in a later post.

Current maturities of long-term debt represent the portion of any long-term debt that is payable within the next year or operating cycle, if longer. However, this amount must be paid from current assets or results in the creation of other current liabilities in order to be classified as current. For example, if the maturity of the debt is extended or if the debt is replaced by equity or other long-term debt, the debt is classified as long-term. 

Accrued liabilities represent expenses incurred by an entity that remain unpaid at the end of the accounting period. Accrued liabilities include items such as utilities payable, wages and salaries payable, interest payable, and taxes payable. These accounts will be paid within the next year or operating cycle, if longer. If the entity will not pay an accrued liability within the next year, it classifies it as a long-term liability.

Unearned revenues (sometimes referred to as deferred revenues) are liabilities resulting from advanced collections of cash from a customer for goods or services to be provided in the future under existing sales or service contracts. The firm removes the liability from the balance sheet when it provides the goods or services to the customer. If the firm will not provide the goods or services associated with the unearned revenues to the customer within the next year (or operating cycle, if longer), it classifies the unearned revenue as a long-term liability.

Noncurrent Liabilities. Noncurrent liabilities are obligations an entity does not expect to satisfy within one year or operating cycle, whichever is longer. Noncurrent liabilities are not liquidated through the use of current assets or the creation of other current liabilities. Long-term notes payable, the long-term portion of capital lease obligations, bonds payable, and pension obligations are examples of noncurrent liabilities.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 239-240*

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