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Unformatted text preview: CHAPTER 9 CLASS NOTES LIABILITIES AND INTEREST Current Liabilities are simply obligations of the company that will be settled within one year from the balance sheet date. They are basically recorded at their face value because they will be due within the one year time period. Remember, it is important to properly identify and classify current liabilities, as they are a critical component in assessing the liquidity of an entity. The primary ones are explained below, although there are other types of current liabilities: 1. Accounts Payable represents the amount owed for inventory, goods or services acquired in the normal course of business. The amount is supported by a bill or an invoice from the supplier that indicates the amount owed. 2. Notes Payable are amounts owed which are represented by a formal contract or agreement. The contract calls for a maturity date, an interest rate, a payment schedule for both principal and interest and, often is secured by assets, known as collateral. If the note is to be paid within one year, it is a current liability; if longer than one year, it is a long-term liability. A note can carry an interest obligation that is paid at the end of the period of maturity, at intervals during the term of the loan, or prepaid at the beginning of the loan period. If it is the latter it is called a discount , which is the difference between the cash received and the ultimate of cash to be repaid on the note. This discount is written off to expense over the life of the note as interest as opposed to accruing interest expense each accounting period. The discount is a contra account to the note and the note payable on the balance sheet will be shown net of the discount, if applicable. 3. Income Taxes Payable are income taxes owed for federal, state and local taxes based upon income. Since the final taxes are not known until the end of the year, often when the tax return or the financial statements are prepared, it is an estimate similar to accrued liabilities but is usually shown separately on the balance sheet. 4. Accrued Liabilities (or Accrued Expenses) are liabilities that have been incurred but not as yet been paid. They are generally related to expenses such as salaries, interest, etc. or any other expense for which estimates are required and bills or invoices have not been received at the period close. The amounts will be estimates based upon past experience and current knowledge usually recorded as adjusting entries.. 5. Current Maturities of Long-Term Debt: Some long-term debt agreements call for periodic payments of principal. If there are periodic payments, the amounts to be paid related to principal within one year of the balance sheet date are classified as a current liability and the remainder of the obligation is classified as long-term debt, a non current liability....
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