Chapter 8: Liabilities
Current liabilities are obligations due within 1 year or within the companies normal operating cycle if longer. Due beyond
that time is long term liabilities.
Current liabilities: a) known amounts b) estimated amounts
Current liabilities of a known amount: include accounts payable, short term notes payable, sales tax payable, accrued
liabilities, payroll, unearned revenue, current portion of long term debt
ACCOUNTS PAYABLE: amounts owed for produced or services purchased on account.
SHORT TERM NOTES PAYABLE: common form of financing, due within a year, used to
borrow cash/purchase assets, must accrue interest expense/interest payable at end of period.
Accrual: Interest expense
Note Payable, short term
SALES TAX PAYABLE: most states levy a sales tax on retail sales, retailers collect tax from customers and thus owe state
for sales tax collected.
Cash sales/sales tax: Cash
Sales tax payable
ACCRUED LIABILITIES (expenses) - usually results from an expense the business has incurred but not yet paid. Creates a
liability aka accrued expense. Ex. Salaries and wages payable (payroll expenses not yet paid at end of period, wages,
salaries), interest payable (on notes payable) , income tax payable (amount of income tax the company owes at yr end)
PAYROLL LIABILITIES- aka employee compensation, major expense, for service organizations this is a major expense
while cost of goods sold is major for merchandising company.
Salary- employee pay stated at monthly or yearly rate
Wage- employee pay stated on hourly rate
Commission- earned by sales employees, percentage of sales that employee has mad.
Bonus- amount over and above regular compensation
--Salary expense represents
(employee pay before tax, etc) creates several payroll liabilities:
Employee income tax payable- employee’s income tax that has been withheld from paychecks
Fica tax payable- ss tax, and medicare tax, withheld from paychecks
Salary payable- net, take home, pay
UNEARNED REVENUE- aka deferred revenue; revenues collected in advance, earned money before providing service
CURRENT PORTION OF LONG TERM DEBT- aka current maturity or current installment, amount of the principal paid
within one year, at end of each year, company reclassifies the amount of long term debt to current liabilities for next yr
Current liabilities that must be estimated:
do not know exact amount, but must be reported on b/s, vary in companies
ESTIMATED WARRANTY PAYABLE- most merchandisers have it, guarantee products under warranty, can extend 90
days to a year, must be recorded in same time period of sales revenue, cannot be known with certainty b/c don’t know what is
defective, estimate it and related liability, others= vacation pay, income taxes
Accrue warranty expense: warranty expense
replace defective: estimated war payable
Estimated warranty payable
not an actual liability, potential liability that depends on future event arising out of past events.FASB