present, the future, and the past.
It is a present responsibility, to sacrifice assets in the future,
caused by a transaction or other event that already has happened.
Specifically, “Elements of
Financial Statements,” Statement of Financial Accounting Concepts No. 6, par. 36, describes
three essential characteristics:
sacrifices of economic benefits
that arise from
obligations (to transfer goods or provide services) to other
that result from
transactions or events.
Liabilities traditionally are classified as either
liabilities in a
classified balance sheet.
Current liabilities are those expected to be satisfied with
or by the creation of other
(Committee on Accounting Procedure, American
Institute of CPAs
, Accounting Research and Terminology Bulletin, Final Edition
, p. 21).
Usually, but with exceptions, current liabilities are obligations payable within one year or within
the firm's operating cycle, whichever is longer.
In concept, liabilities should be reported at their
; that is, the valuation
amount is the present value of all future cash payments resulting from the debt, usually principal
and/or interest payments.
In this case, the amount would be determined as the present value of
$100,000, discounted for three months at an appropriate rate of interest for a debt of this type.
This is proper because of the time value of money.
In practice, liabilities ordinarily are
reported at their
maturity amounts if
payable within one year because the relatively short time
period makes the interest or time value component immaterial.
Accounting Principles Board
Opinion No 21
, “Interest on Receivables and Payables,” specifically exempts from present value
valuation all liabilities arising in connection with suppliers in the normal course of business and
due within a year.
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