Chapter 13 Outline on Current Liabilities
Accounting 340: Howard Bunsis
Chapter 13: Liabilities: Fall 2010
Concept of Liabilities
In general, liabilities involve future disbursements of assets or services.
According to the FASB, a liability has three essential characteristics:
(a) it is a present obligation that entails settlement by probable future transfer or
use of cash, goods, or services;
(b) it is an unavoidable obligation; and
(c) the transaction or other event creating the obligation has already occurred.
Liabilities are classified on the balance sheet as current obligations or long-term
Current liabilities are those obligations whose liquidation is reasonably expected to require use
of existing resources classified as current assets or the creation of other current liabilities.
Current ratio = Current Assets / Current Liabilities
The benchmark is not 1.0
The benchmark is specific by industry
Acid Test Ratio = (Cash + Marketable Securities + Net Receivables) / Current Liabilities
Accounts payable represents obligations owed to others for goods, supplies, and services
purchased on open account.
These obligations, commonly known as trade accounts payable, should be recorded to
coincide with the receipt of the goods or at the time title passes to the purchaser.
Example: Congo uses the periodic method and the gross method to account for purchase
On 7/1, Purchased 40,000 on account, terms 2/10, n/30, FOB shipping.
freight costs of 1,200.
On 7/3, returned 6,000 of damaged goods.
On 7/10, paid for the
7/1: Db. Purchases
Cr. Accounts Payable
Db. Freight-In 1,200
7/3: Db. Accounts Payable
Cr. Purchase returns & allowances
Db. Accounts Payable
33,320 (34,000 * .98)
Cr. Purchase Discounts