Accounting for Current Liabilities
Current liabilities
Liabilities result from some past transaction and are obligations to pay cash, provide services, or deliver goods at some future time. This definition includes each of the liabilities discussed in previous chapters and the new liabilities presented in this chapter. The balance sheet divides liabilities into current liabilities and long-term liabilities. Current liabilities are obligations that (1) are payable within one year or one operating cycle, whichever is longer, or (2) will be paid out of current assets or create other current liabilities. Long-term liabilities are obligations that do not qualify as current liabilities.
In this section, we describe liabilities not previously discussed that are clearly determinable—sales tax payable, federal excise tax payable, and current portions of long-term debt. Warranties, notes payable and payroll liabilities will be examined later. This video is good at reviewing current liabilities we have already discussed plus some new topics:
Sales tax payable Many states have a state sales tax on items purchased by consumers. The company selling the product is responsible for collecting the sales tax from customers. When the company collects the taxes, the debit is to Cash and the credit is to Sales Tax Payable. Periodically, the company pays the sales taxes collected to the state. At that time, the debit is to Sales Tax Payable and the credit is to Cash.
To illustrate, assume that a company sells merchandise in a state that has a 6% sales tax. If it sells goods with a sales price of $1,000 on credit, the company makes this entry:
Accounts Receivable (1,000 + 60) |
Debit 1,060 |
Credit |
Sales | 1,000 | |
Sales Tax Payable (1,000 x 6%) | 60 | |
To record sales and sales tax payable. |
Sales Tax Payable |
Debit 6,000 |
Credit |
Cash | 6,000 | |
Accounts Receivable (2,000 + 120 + 200) |
Debit 2,320 |
Credit |
Sales | 2,000 | |
Sales Tax Payable (2,000 x 6%) | 120 | |
Federal Excise Tax Payable (2,00 x 10%) | 200 | |
To record the sale of a diamond ring. |
Current portions of long-term debt Accountants move any portion of long-term debt that becomes due within the next year to the current liability section of the balance sheet. For instance, assume a company signed a series of 10 individual notes payable for $10,000 each; beginning in the 6th year, one comes due each year through the 15th year. Beginning in the 5th year, an accountant would move a $10,000 note from the long-term liability category to the current liability category on the balance sheet. The current portion would then be paid within one year.
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