Scribd
Upload
11 views

CH 4

simple and easy

Uploaded by

emanuelmuluken14
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
11 views

CH 4

simple and easy

Uploaded by

emanuelmuluken14
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

CHAPTER FOUR: CURRENT LIABILITY

4.1. Introduction

What is liability?

 Its present obligation as result of past event, as a result economic resource will out flow from
the entity. Liability classified as:

I. Current liability or short term liability &

II. Noncurrent or long term liability

4.1. Nature of current liability


What is current liability?
 Liabilities that are to be paid out of current assets and are due within a short time, usually
within one year.
 It is A debt :
 That the company expects to pay within one year or
 The operating cycle, whichever is longer.
Examples of Current liability:
Accounts payable Income taxes payable
Notes payable Wages payable
Interest payable Current portion of long term debt
Unearned revenue
 Account payable: Accounts payable, or trade accounts payable, are balances owed to others
for goods, supplies, or services purchased on open account. Accounts payable arise because of the
time lag between the receipt of services or acquisition of title to assets and the payment for them.
 Notes Payable: A written promissory note to pay a certain sum of money on a specified future
date. They may arise from purchases, financing, or other transactions.

 It Usually requires borrower to pay interest

 Frequently issued to meet short-term financing needs

 Issued for varying periods of time

 Usually classified as current liability; if due for payment within one year of statement of
financial position date.

Example: ABC Company purchase goods on account for Br 6,000 on September 1, 2014 by signing
to pay annual interest 10% and principal on Jan 1, 2015.

Required:

1
1. Record for Sep 1, and DEC. 31accrued interest at financial statement date.

So/n

1. Sep1/ Purchase 6000

Note payable 6000

2. Dc.31/ Interest Expense 200

Interest payable 200

 Current Maturities of Long-Term Debt

Reports as part of its current liabilities the portion of bonds, mortgage notes, and other long-term
indebtedness that matures within the next fiscal year. It categorizes this amount as current maturities
of long-term debt. When only a part of a long-term debt is to be paid within the next 12 months, as in
the case of serial bonds that it retires through a series of annual installments, the company reports the
maturing portion of long-term debt as a current liability and the remaining portion as a long-term debt.

 Dividend payable

A cash dividend payable is an amount owed by a corporation to its shareholders as a result of board of
directors’ authorization (or in other cases, vote of shareholders).

 Unearned Revenues

When a company receives an advance payment, it debits Cash and credits a current liability account
identifying the source of the unearned revenue. Revenues received before the company

 delivers goods or

 provides services. E.g Unearned rent revenue

 Sales tax payable

Revenue account for the amount of the sales taxes due the government on these sales and credits the
Sales Taxes Payable account for the same amount.

 Value added tax payable: It is a consumption tax.


Example: X Farms Wheat grows, wheat and sells it to Sunshine Baking for Br 1,000 on cash with
VAT is 10%.
Journal entry
Cash 1100
Sale revenue 1000
Value added tax payable 100

2
 Sales Taxes Payable: Sales taxes are expressed as a stated percentage of the sales price.
Selling company collects tax from customer remits collections to taxing authority.
Example: A Grocery sells loaves of bread totaling f or Br 800 on a given day. Assuming a sales tax
rate of 6%.
Journal entry:
Cash 848
Sales Taxes Payable 48
Sales Revenue 800
 Salaries and Wages: Companies report as a current liability the amounts owed to employees for
salaries or wages at the end of an accounting period. In addition, they often also report as current
liabilities Payroll deductions.

4.2. Presentation and analysis of current liabilities

The current liabilities accounts are commonly presented after non-current liabilities in the
statement of financial position. Within the current liabilities section, companies may list the
accounts in order of maturity, in descending order of amount, or in order of liquidation
preference.

You might also like