How Should Current Liabilities Be Accounted for

How Should Current Liabilities Be Accounted For?

Sharon Acton

ACC205

Gregory Goussak

July 16, 2012

How Should Current Liabilities Be Accounted For?

In this paper I plan to explain the different types of current liabilities, and how they are accounted for. The types I plan to explain are: current liabilities of known amount, current liabilities that must be estimated and contingent liabilities.

Current liabilities of known amount: These are debts that are due to be paid within one year or the operating cycle, whichever is longer; additionally, such obligations will characteristically involve the use of current assets, the creation of another current liability, or the provision of some service (Investopedia, 2012). Some examples are:

1. Accounts payable—Amounts owed for goods or services purchased on open account.

2. Short-term notes payable—Promissory notes due within one year; the interest is paid at maturity.

a. The entry to record the note:

Inventory (Cash) XX

Note Payable XX

b. The following entry is required when the note is paid.

Note Payable XX

Interest Expense XX

Interest Payable XX

Cash XX

3. Sales tax payable—Reports the sales taxes that are collected by retailers and that must be periodically remitted to the taxing authority.

Accounts Receivable (Cash) XX

Sales Revenue XX

Sales Tax Payable XX

4. Current portion of long-term debt—The principal portion of a long-term installment debt that is payable within one year. The company may make an adjusting entry to shift the current installment of the long-term debt to a current liability account:

Long-Term Debt XX

Current Portion of Long-Term Debt XX

5. Accrued expenses (accrued liabilities)—Expenses incurred but not yet paid.

6. Payroll liabilities (employee compensation)—A major expense for many companies. Employers often have liabilities to the employee for the employee’s net pay as well as liabilities to the...