Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD Chapter 13 Current Liabilities.

Financial AccountingDave Ludwick, P.Eng, MBA, PMP, PhD

Chapter 13Current Liabilities

In this chapter…Balance Sheet

Current Assets

Cash 10000

Current Liabilities

Accounts Payable

Chapter

13 5000

Accounts Receivable 20000 Wages Payable 11 25000

Notes Receivable 15000 Utilities Payable 13 2000

Marketable Securities 25000 Long-Term Debt

Inventory 120000 Notes Payable 20000

Capital Assets Bonds Payable 600000

Equipment 250000 Owner’s Equity

Buildings 500000 Common Stock 300000

Goodwill 60000 Retained Earnings

48000

Total Assets 1000000 Total Liabilities + OE 1000000


Liabilities• Liability – a future payment of assets or services that a

company is presently obligated to make as a result of a past transaction or event.

• Current Liabilities – aka short-term liabilities, are obligations expected to be settled within one year of the balance sheet date or within the company’s next operating cycle, which ever is longer– Examples: Accounts payable, wages payable, unearned revenues,

current portion of long-term debt

• Long-term Liabilities – obligations expected to be paid in over one year or longer than one operating cycle


Current Portion of Long-term Debt• The current portion of long-term debt is the part of long-

term debt that is due within the longer of one year of the balance sheet date or the next operating cycle.– It is reported as a current liability

– The rest of the debt is reported as Long-term Liability

– Note that the amounts shown as both current and long-term liabilities are principal amounts only

– Interest is recorded as interest payable for any interest that has accrued to the point when statements are drawn up.

• Demand loans are loans that could be called by the creditor at any time– They are shown as Current Liabilities on the Balance Sheet


Determinable Liabilities• To account for a liability, the accountant needs to know

– Who to pay

– When to pay

– How much to pay


Types of Current Liabilities• Trade Accounts Payable or Accounts Payable

– These are amounts owed to suppliers from whom the company purchased raw materials or operating supplies

– Example, our company purchases lumber from Beaver Lumber on net 30 terms

– Since the payment is due in 30 days, it is a current liability

Date Account Titles and explanation PR Debit Credit

Jan 31 Lumber (asset) 5000

Accounts Payable 5000


Types of Current Liabilities• Payroll Liabilities

– As we saw in Chapter 11, payroll liabilities are amounts owing to employees for services already performed.

– These may include (or will be broken out as) income taxes Payable, CPP Payable, EI Payable


Types of Current Liabilities• Provincial Sales Tax (PST) and Goods and Services Tax

(GST) Payable– PST is collected on a sale to a final customer. If a business is a

middle part of the distribution channel, no PST is collected

– Ex (p 659): Best Furniture of Maidstone, SK sells a couch (with cost of 12000) for 16000, with 7% PST


Aug 1 Cash 17120

Sales Revenue 16000

PST Payable 1120

COGS 12000

Inventory 12000


Types of Current Liabilities• When Best Furniture remits the PST it collected, the

following entry is made:

– If there is any balance in the PST Payable account at the time the Balance Sheet is prepared, then it is showed as a current liability


Jan 31 PST Payable 1120

Cash 1120


Types of Current Liabilities• GST – GST must be collected and paid on almost every

transaction– GST collected from sales goes into a GST Payable account. GST

paid on purchases goes into a GST Receivable account

– When the business submits its GST report, these two accounts are netted out to determine if the business must pay or can receive a GST refund.

– Example, for Inventory purchase


Jul 11 Inventory 1000

GST Receivable 50

Cash 1050


Types of Current Liabilities• For the sale of assets

• The GST T-account looks like:


Aug 1 Cash 1575

Sales Revenue 1500

GST Payable 75

COGS 1000

Inventory 1000

GST Rec/Payable

Jul 11 50

Aug 1 75

Bal. 25


Types of Current Liabilities• So the GST balance is such that there is an amount due to

the Receiver General. The journal entry is then:


Sep 1 GST Payable 75

GST Receivable 50

Cash 25


Types of Current Liabilities• Unearned Revenues

– As we have seen before, Unearned Revenues are amounts that have been received from customers for future goods or services

– Until the goods or services are provided, the amount is shown as a current liability

– A good example are airplane tickets and entertainment tickets. They are purchased in advance of the company providing the service


Jan 3 Cash 2000

Advanced Ticket Sales 2000

Jan 31 Advanced Ticket Sales 2000

Sales Revenue 2000


Mid-Chapter Demonstration Problem• Try the Mid-Chapter Demo problem


Short-term Notes Payable• A short-term note payable is a promise to pay a specified

amount on a date within one year of the balance sheet date.– Sometimes a company will replace an account payable amount due

(which does not require interest paid) with a note payable, which does require interest paid.

– Interest owed = Principal x Annual Interest Rate x No. days/365

– If a balance sheet is prepared some time after the note payable is agreed to, but before paid, then the balance sheet will show the Notes Payable as well as a separate line for Interest Payable (Exh 13.9)


Short-term Notes Payable• Lets say we take a 1 yr loan from the bank, as a Note Payable

• Then, when a balance sheet is prepared on Dec 31, interest must be shown and interest expense accrued– Assuming 5% annual interest, Interest = 20000 x .05 x 180/365


Jul 1, 08 Cash 20000

Notes Payable 20000


Dec 31, 08 Interest Expense 500

Interest Payable 500


Short-term Notes Payable• When the Note is finally paid off, interest is calculated

again and paid– Interest for the remaining ½ year = 20000 x .05 x ½ = 500

– To pay off the Note:


Jul 1, 09 Interest Expense 500

Interest Payable 500


Jul 1, 09 Interest Payable 1000

Note Payable 20000

Cash 21000


Another Example• This time, we get a $15000 Note Payable at 4% due July 1

• Then, when a balance sheet is prepared on Dec 31, interest must be shown and interest expense accrued– Interest = 15000 x .04 x (29+31)/365 = 98.63


Nov 1, 08 Cash 15000

Notes Payable 15000


Dec 31, 08 Interest Expense 98.63

Interest Payable 98.63


Short-term Notes Payable• When the Note is finally paid off, interest is calculated for the

portion after the year end and paid– Interest for the remaining = 15000 x .04 x (31+28+31+30+31+30+1)/365

– To pay off the Note, we pay all the interest (98.63+299.18) = 397.81


Jul 1, 09 Interest Expense 299.18

Interest Payable 299.18


Jul 1, 09 Interest Payable 397.81

Note Payable 15000

Cash 15397.81


Estimated Liabilities• Estimated Liability - a liability that is known, but the exact

amount and time of when it is paid may not be known – Examples are Warrantees and Taxes

• Warranty – an obligation of a seller to pay for replacing or repairing the product if and when it fails– To comply with the matching principle, the seller must allocate

some warranty expense in the period of the product’s sale

– When calculating warranty, use the costs that the company must bear to set aside warranty

• A company doesn’t charge itself selling price in warranty claims


Jul 7, 06 Warranty Expense 200

Warranty Payable 200


Estimated Liabilities• The exact amount to record as a warranty expense and warranty

liability must be estimated, usually based on past experience. – It might be a percentage of the product’s sale price

• When the customer returns for repair, the liability is used to cover some of the cash outlay required to honour the warranty.– Lets say the product is on warranty for parts only and labour is to be paid

by the customer


Oct 7 Warranty Payable 100

Cash 200

Inventory 100

Wages Payable 200


Estimated Liabilities• Income Tax Liabilities – Income taxes are a liability until

paid to the government

• The liability is created when the income is earned

• When the tax installment is actually paid


Jul 7, 06 Income Tax Expense 20000

Income Tax Payable 20000


Jul 7, 06 Income Tax Payable 20000

Cash 20000


Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD Chapter 13 Current Liabilities.

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