Current Liabilities and Long-term Liabilities

In balance sheet, liabilities define as an obligation of an entity arising from past transactions or events, represent as creditor’s claim on business assets, the settlement of which may result in the transfer or use of assets, provision of services, or other arrangement to generate any future economic benefits. Liabilities refer to money lend from person, bank or suppliers to be used for business operation that is payable in a certain period or based on agreement.

Liabilities refer to one of the source of funds for a company and it will use for purchasing power to expand the business operation. These debts can be paid with interest in an agreed obligation contract.

Liabilities in Balance Sheet can be classified into three categories:

• Current Liabilities
• Long Term Liabilities
• Contingent Liabilities

Current Liabilities represent the amount owed to creditors’ payable within 12 months. These liabilities are allocated for normal operating expenses due within a year. Managing current liabilities is important with business cash flow cycle to ensure the liquidity of the company operation. The company has to pay these liabilities in a normal accounting cycle; it reflects the effective management of working capital.

The following are the classification of current assets:

Accounts payable

These accounts represent the purchase of supplies or any assets use for business operation on credit or on account and intent to pay within the normal operating cycle or within a year. Accounts payable owed to suppliers for products and services that has been delivered but not paid and it can be paid in a week, month or in a year.

Notes Payable

This account is the current portion of long term payable. The current liabilities occurred when purchase in a supplier payable in specified time with promissory note that usually includes interest.

Accrued Expenses

Accrued expenses represent operating expenses incurred but not paid. These expenses refers to opposite way of prepaid expenses wherein paid already but not recorded as an expense due to actual recognition of expense during the monthly period.  Accrued expenses represent amount of services render or good received but not yet paid.

Salaries Payable

This account represents amount owed to employees. The type of current liabilities wherein the company has to pay the due salary for specified period but not paid on the time of occurrence. For instance, the salary due for the month ended April 30 and the company paid it May 2, the accounting entry as follows:

     April 30

     

     Salary Expense            

            Salaries Payable

     

     May 2

     Salaries Payable

            Cash in Bank

Dividends Payable

This payable is the payments due to shareholders when they declare the dividend called dividends payable.

Income Tax Payable

These liabilities refer to the amount of tax due to the government authority based on the accounting profit earned.

Unearned Revenue

Unearned revenue or unearned income pertains to the money receive from customers that it hasn’t yet earned by delivering the goods or services that has to be done for customers however that it anticipates earning within 12 months on the date of the balance sheet.

Non-current Liabilities or long-term liabilities are those liabilities that a company has to pay back the loan / debt after one accounting period or more than one year. Long-term liabilities are normally has interest bearing. The company has to pay those loan based on the installments agreed upon with each creditor.

The long-term liabilities are generally an important part of the capital structure of a company. It provides fund for the purchase of fixed assets used to generate income over many years and provide significant benefits to a company that should be settle in due time to ensure the stability of the business.

The long-term liabilities reflect the solvency of the business operation. It is necessary that the company has to pay its short-term and long-term debt obligations of the company otherwise the assets of the business will sacrifice and the business operation will finally closed.

Bonds Payable

These accounts are bonds issued by a corporation to support the finances for expensive assets. Bonds are part of the corporation's obligation and will usually be reported as a long-term liability.

Most bonds require the issuing corporation to pay interest semi-annually and to pay the principal amount on the date that the bonds mature. Based on the accrual method of accounting, the corporation must report a bond's accrued interest expense and liability as of the date of its financial statements.

Issuing bonds instead of common stock delivers two benefits in a corporation. First, the strong ownership interest of its common stockholders and second, the bond interest expense is deductible on the corporation's income tax return. The tax deduction of bond interest expense will result in a tax savings for a profitable corporation and this is effective practice of reducing the corporation's cost of the interest payments to bondholders.

Contra liabilities are liability accounts with debit balances. Examples of contra liability accounts include:

• Discount on Notes Payable
• Discount on Bonds Payable

Long-term Leases 

These are the capital leases under the long-term liabilities refer to rental arrangement that extend past 12 months of the date of the balance sheet while in assets account the rental contract during the period of one year, it is treated as prepaid rent before it becomes monthly expenses and to be reflected in income statement.

Contingent Liabilities are potential liabilities and it is normally derived from mishandled or uncontrollable situation. These liabilities dependent upon some future event occurring or not occurring, they may or may not become actual liabilities. There are three situations in contingent liabilities such as warranty of a company’s products, the guarantee of another party’s loan, and lawsuits filed against the company.

For instance, the company gave product warranty unfortunately; the warranty had confusion with a certain clause. If the customer complaints with the defective product but the company don’t want to accept and they blame the customer for the problem. The customers went to the court and asked for refund. When the court decides to reimburse the amount of the product to the customer it is uncertain on the part of the company and they have to pay it back to the customer.

Another example, when the company terminated one of the employee without justified reason and the employee file lawsuits against the company it is clear that the company acted improperly, the company will record this transaction as a loss on an income statement that can be estimated and a balance sheet liability.

In accounting rules, the contingent loss is probable and the amount of the loss can be estimated, the company should record the liability on its balance sheet and a loss on its income statement. If the contingent loss is isolated, no liability or loss is recorded then it should be disclosed in the notes to the financial statements.

Notes to the financial statements can expose all important information that should not be ignored when reading a company's balance sheet.