Accounting for Current Liabilities

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10 Nov 2010
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Accounting for Current Liabilities
¾ Two key features: it is likely to be paid within one year or operating cycle, and it will
be paid from existing current assets or through the creation of other current liabilities
¾ Liabilities are described as definitely determinable, estimable, or contingent
Definitely Determinable Liabilities
¾ This is one with a known amount, payee, and due date
Operating Line of Credit
¾ This means that the company has been pre-authorized by the bank to borrow money,
up to a preset limit, when it is needed. Collateral is usually required by the bank as
protection in the event of a default on the loan. A number of companies show a
negative, or overdrawn, cash balance at year end as a result of using their line of
credit. This amount is known as bank indebtedness, bank overdraft, or bank advances
Notes Payable
¾ Notes payable are obligations in the form of written promissory notes. Most notes are
interest-bearing. Interest is due at maturity; however, interest accrues over the life of
the note and must be recorded periodically
Sales Taxes Payable
¾ Companies serve only as a collection agent for the government. Sales taxes are not
reported as an expense, nor should it be recorded as a form of revenue
Payroll and Employee Benefits
¾ (PSOR\HUVDUHREOLJDWHGWRSD\IRUHPSOR\HHV¶VDODULHVRUZDJHV6DODULHVDUHDQ
annual amount, whereas wages are based on a rate per hour. The amount in the
Salaries and Wages expense account is called gross earnings. The amount less
deductions (i.e. taxes, union) is called the net pay. With every payroll, the employer
incurs liabilities to pay various payroll costs (i.e. their share of CPP or EI)
Unearned Revenues
¾ When the advance payment is received, Cash is debited. A current liability account
identifying the source of the unearned revenue is credited. When the revenue is
earned, the unearned revenue account is debited. An earned revenue account is
credited
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Document Summary

Two key features: it is likely to be paid within one year or operating cycle, and it will be paid from existing current assets or through the creation of other current liabilities. Liabilities are described as definitely determinable, estimable, or contingent. This is one with a known amount, payee, and due date. This means that the company has been pre-authorized by the bank to borrow money, up to a preset limit, when it is needed. Collateral is usually required by the bank as protection in the event of a default on the loan. A number of companies show a negative, or overdrawn, cash balance at year end as a result of using their line of credit. This amount is known as bank indebtedness, bank overdraft, or bank advances. Notes payable are obligations in the form of written promissory notes. Interest is due at maturity; however, interest accrues over the life of the note and must be recorded periodically.

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