What is a Current Liability?
Liabilities are defined as “creditors' claims on total assets” and as “existing debts and obligations.”
settle or pay these claims, debts, and obligations at some time in the future by transferring assets or services. The
future date on which they are due or payable (the maturity date) is a significant feature of liabilities.
is a debt that a company reasonably expects to pay (1) from existing current assets or through the
creation of other current liabilities, and (2) within one year or the operating cycle, whichever is longer.
Debts that do
not meet both criteria are
A company that has more current liabilities than current assets often lacks liquidity, or short-term debt-paying
ability. In addition, users want to know the types of liabilities a company has.
If a company declares bankruptcy, a
specific, predetermined order of payment to creditors exists. The different types of current liabilities include notes
payable, accounts payable, unearned revenues, and accrued liabilities such as taxes, salaries and wages, and interest.
Companies record obligations in the form of written notes as
. They often use notes payable instead of
accounts payable because
notes payable give the lender written documentation of the obligation in case legal
remedies are needed to collect the debt.
Notes payable usually require the borrower to pay interest. Notes are
issued for varying periods of time.
Those due for payment within one year of the balance sheet date are usually
classified as current liabilities.
Most notes are interest-bearing.
Assume that First National Bank agrees to lend $100,000 on September 1, 2010, if Cole Williams Co. signs a $100,000, 12%,
four-month note maturing on January 1. When a company issues an interest-bearing note, the amount of assets it receives
generally equals the note's face value. Cole Williams Co. therefore will receive $100,000 cash.
(To record issuance of 12%, 4-month note to First National Bank)
Interest accrues over the life of the note, and the issuer must periodically record that accrual. If Cole Williams Co.
prepares financial statements annually, it makes an adjusting entry at December 31 to recognize four months of
interest expense and interest payable of $4,000
(To accrue interest for 4 months on First National Bank note)
In the December 31 financial statements, the current liabilities section of the balance sheet will show notes payable $100,000 and
interest payable $4,000. In addition, the company will report interest expense of $4,000 under “Other expenses and losses” in the
income statement. At maturity (January 1), Cole Williams Co. must pay the face value of the note ($100,000) plus $4,000 interest