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liability an obligation that you owe Liabilities Anything a company owes to people or businesses other than its owners is considered a liability liabilities include accounts payable which is the account when your people pay on account liabilities are things that are owed by the company(or person) such as car loans, short term or long term loans, any debt to anyone for any reason. Liabilities = what the business owes outsiders (bank loan, accounts payable) A liability is something which a firm owes to a person or another firm. It may be in the form of creditors - people or firms who have sold you goods which you have not yet paid for, or it may be money borrowed from a financial institution – loans In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Individual or group must adopt corporate charter and file it with the state. •

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They embody a duty or responsibility to others that entails settlement by future transfer or use of assets, provision of services or other yielding of economic benefits, at a specified or determinable date, on occurrence of a specified event, or on demand; The duty or responsibility obligates the entity leaving it little or no discretion to avoid it; and, The transaction or event obligating the entity has already occurred.

Examples of types of liabilities include: money owing on a loan, money owing on a mortgage, or an IOU. Liabilities are defined as “creditors' claims on total assets” and as “existing debts and obligations.” a. These claims, debts, and obligations must be settled or paid at some time in the future by the transfer of assets or services. A liability is a debt assumed by a business entity as a result of its borrowing activities or other fiscal obligations (such as funding pension plans for its employees). Liabilities are paid off under either short-term or long-term arrangements. The amount of time allotted to pay off the liability is typically determined by the size of the debt; large amounts of money usually are borrowed under long-term plans.

Payment of a liability generally involves payment of the total sum of the amount borrowed. In addition, the business entity that provides the money to the borrowing institution typically charges interest, figured as a percentage of the amount that has been lent. Recorded on the balance sheet (right side), liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses. Liabilities are a vital aspect of a company's operations because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, the outstanding money that a company owes to its suppliers would be considered a liability. Outside of accounting and finance this term simply refers to any money or service that is currently owed to another party. One form of liability, for example, would be the property taxes that a homeowner owes to the municipal government. Current liabilities are debts payable within one year, while long-term liabilities are debts payable over a longer period.

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Current liabilities. In general, if a liability must be paid within a year, it is considered current. This includes bills, money you owe to your vendors and suppliers, employee payroll and short-term loans.

Current Liability Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Current liabilities can be: • • • • • •

Trade creditors, which is the name we give to amounts owed to suppliers. Accruals, which is the name we give to amounts still owed at the year end and not yet recorded in the books of account. Proposed items such as Dividends proposed, which means amounts the business promises to pay in the coming year. Payable items such as Tax payable which is payable within the coming year. Overdraft, which is amounts owed to the bank. Short term loans

Current Liabilities

A company's debts or obligations that are due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities. Analysts and creditors will often use the current ratio, (which divides current assets by liabilities), or the quick ratio, (which divides current assets minus inventories by current liabilities), to determine whether a company has the ability to pay off its current liabilities.

Current liabilities are what a company currently owes to its suppliers and creditors. These are short-term debts, all due in less than a year. Paying them off normally requires the company to convert some of its current assets into cash. Beyond simply being bills to pay, liabilities -- confusing as this might sound -- are also a source of assets. Any money that a company pulls from a line of credit, or postpones paying from its accounts payable, is an asset that can be used to grow the business. There are five main categories of current liabilities: • • • • •

Accounts payable Accrued expenses Income tax payable Short-term notes payable Portion of long-term debt payable

Accounts payable This is the money the company currently owes to its suppliers, partners, and employees -- the basic costs of business that the company hasn't yet paid, for whatever reason. One company's accounts payable is another company's accounts receivable, which is why both terms are similarly structured. A company has the power to push back the due dates on some of its accounts payable. Paying those debts later than expected can often produce a short-term increase in earnings and current assets. Accrued expenses The company has racked up these bills, but not yet paid them. These are normally marketing and distribution expenses that are billed on a set schedule and have not yet come due. Income tax payable This is a specific type of accrued expense -- the income tax a company accrues over

the year, but does not have to pay yet, according to various federal, state and local tax schedules. Although they're subject to withholding, some taxes simply are not accrued by the government over the course of the quarter or the year. Instead, they're paid in lump sums whenever the bill is due.

Short-term notes payable The company has drawn off this amount from its line of credit from a bank or other financial institution. It needs to be repaid within the next 12 months. Portion of long-term debt This represents a chunk of a company's longer-term obligations that may come due in a given year or quarter. That's why it's counted as a current liability, even though it's called "long term. In terms of accounting practices, current liabilities are understood to be any outstanding indebtedness that is anticipated to be paid in full within the current fiscal year. Payments for current liabilities are made from payables accounts, such as the operations account for a business. Understanding what does and does not constitute a current liability makes the process of managing the financial affairs of a company or a household much easier, and is an excellent indicator of the overall financial stability of the organization. When defining current liabilities, it is important to think in terms of recurring expenses that are generally handled within thirty to ninety days as a matter of normal operations. These examples of current liabilities would include raw materials used in the production process, goods and services that are used in the process of operating the company on a day to day basis, and equipment purchases that will require only a short time to pay in full. Short-term loans that will also be paid off during the current fiscal year may be considered as current liabilities. Along with items that can be considered current debt, any other items that appear on the balance sheet for the corporation may be considered current liabilities, provided the money owed will be paid off within the year. Because balance sheets normally group short term and long term debt into two different sections, each line item should be evaluated according to the anticipated resolution date and placed on the sheet accordingly. One exception to the general application of current liabilities has to do with payments that are currently due on long term mortgages, bonds, and business loans. If the payment dates occur in the current fiscal year, it is acceptable to consider the amount of those payments as current liabilities. However, any remaining balance due on those long-term obligations should be recorded elsewhere in the company

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Current liabilities — these liabilities are reasonably expected to be liquidated within a year. They usually include payables such as wages, accounts, taxes, and accounts payables, unearned revenue when adjusting entries, portions of long-term bonds to be paid this year, short-term obligations (e.g. from purchase of equipment), and others.

current liabilities Finance Definition Obligations that are expected to be paid or performed within one year or within the normal operating cycle of a business, whichever is longer. Current liabilities are listed on the company’s balance sheet and include accounts payable, notes payable, taxes payable, and salaries payable A current liability is a debt that can reasonably be expected to be paid 1. from existing current assets or through the creation of other current liabilities, and 2. within one year or the operating cycle, whichever is longer.

1. Sales taxes payable - Sales taxes are expressed as a percentage of the sales price. a. The seller collects the sales tax from the customer when the sale occurs and remits the tax collected to the state's department of revenue periodically (usually monthly). b. Most states require that the sales tax collected be rung up separately on the cash register. (Gasoline sales are a major exception.) 2. Payroll and payroll taxes payable - Every employer incurs liabilities relating to employees' salaries and wages; those liabilities are the payroll itself and the taxes on that payroll.

a. Wages and salaries payable: This liability is the amount owed to employees for services performed. i. Wages: Liabilities to employees compensated on an hourly basis ii. Salaries: Compensation owed to supervisory employees who are compensated for performing a task and not compensated on an hourly basis. b. Withholding taxes—federal and state income and FICA (Note that the employer is responsible for collecting both Employer and Employee portions of payroll tax)

i. Employers are responsible for two components of withholding taxes: 1. Employee taxes: These are the employee’s income taxes owed to federal, social security, state and local governments. a. Often referred to as employee deductions, it is the employers responsibility to deduct these taxes and remit them to the appropriate agency for the employee. i. These items are carried as current liabilities on the employers books. 2. Employer taxes: Employers incur various payroll taxes levied upon the employer. a. These payroll taxes include the employer’s share of Social Security (FICA) taxes and state and federal unemployment taxes. 3. Unearned revenues – Companies such as magazine publishers and airlines typically receive cash before

goods are delivered or services are rendered. The companies account for these unearned revenues as follows: a. When the advance (prepayment) is received, both Cash and a current liability account identifying the source of the unearned revenue are increased. b. When the revenue is earned (service is performed), the unearned revenue account is decreased (debited) and an earned revenue account is increased (credited). 4. Current maturities of long-term debt - The current portion of a long-term debt should be included in Current Liabilities. a. The current maturities portion of long-term debt are frequently identified in the current liabilities portion of the balance sheet as long-term debt due within one year. b. It is not necessary to prepare an adjusting entry to recognize the current maturity of long-term debt.

Accounts payable is a file or account that contains money that a person or company owes to suppliers, but hasn't paid yet (a form of debt). When you receive an invoice you add it to the file, and then you remove it when you pay. Thus, the A/P is a form of credit that suppliers offer to their purchasers by allowing them to pay for a product or service after it has already been received. In households, accounts payable are ordinarily bills from the electric company, telephone company, cable television or satellite dish service, newspaper subscription, and other such regular services. Householders usually track and pay on a monthly basis by hand using cheques or credit cards. In a business, there is usually a much broader range of services in the A/P file, and accountants or bookkeepers usually use accounting software to track the flow of money into this liability account when they receive invoices and out of it when they make payments. Commonly, a supplier will ship a product, issue an invoice, and collect payment later, which creates a cash conversion cycle, a period of time during which the supplier has already paid for raw materials but hasn't been paid in return by the final customer. When the invoice arrives it is matched to the packing slip and purchase order, and if all is in order, the invoice is paid. This is referred to as the three-way match

accounts payable Definition Money which a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that

the liability will be fulfilled in less than a year. When accounts payable are paid off, it represents a negative cash flow for the company.

Accounts Payable - AP What Does Accounts Payable - AP Mean?

An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities. Accounts payable are often referred to as "payables". Another common usage of AP refers to a business department or division that is responsible for making payments owed by the company to suppliers and other creditors.

Investopedia explains Accounts Payable - AP...

Accounts payable are debts that must be paid off within a given period of time in order to avoid default. For example, at the corporate level, AP refers to short-term debt payments to suppliers and banks. Payables are not limited to corporations. At the household level, people are also subject to bill payment for goods or services provided to them by creditors. For example, the phone company, the gas company and the cable company are types of creditors. Each one of these creditors provide a service first and then bills the customer after the fact. The payable is essentially a short-term IOU from a customer to the creditor. Each demands payment for goods or services rendered and must be paid accordingly. If people or companies don't pay their bills, they are considered to be in default.

utilities payable A current liability account that reports the amounts owed to the utility companies for electricity, gas, water, phone used up to the date of the balance sheet. If a utility bill has not been received, the company will have to estimate the amount owed for the service it has used up to the balance sheet date. Instead of using a separate account for utilities payable, the amounts owed are often included in Accounts Payable.

accounts payable This current liability account will show the amount a company owes for items or services purchased on credit and for which there was not a promissory note. This account is often referred to as trade payables (as opposed to notes payable, interest payable, etc.)

taxes payable A liability account that reports the amount of taxes that a company owes as of the balance sheet date.

CURRENT LIABILITIES Current liabilities are short-term financial obligations that are paid off within one year or one current operating cycle, whichever is longer. (A normal operating cycle, while it varies from industry to industry, is the time from a company's initial investment in inventory to the time of collection of cash from sales of that inventory or of products created from that inventory.) Typical current liabilities include such accrued expenses as wages, taxes, and interest payments not yet paid; accounts payable; short-term notes; cash dividends; and revenues collected in advance of actual delivery of goods or services. Economists, creditors, investors, and other members of the financial community all regard a business entity's current liabilities as an important indicator of its overall fiscal health. One financial indicator associated with liabilities that is often studied is known as working capital. Working capital refers to the dollar difference between a business's total current liabilities and its total current assets. Another financial barometer that examines a business's current liabilities is known as the current ratio. Creditors and others compute the current ratio by dividing total current assets by total current liabilities, which provides the company's ratio of assets to liabilities. For example, a company with $1.5 million in current assets and $500,000 in current liabilities would have a three to-one ratio of assets to liabilities. Current Liabilities are those debts the company owes that come due within one year. Like Current Assets, the operating cycle can be different. In that case, use that to classify debts into current and non-current. Experience The most commonly seen Current Liabilities are those items that affect expenses. Many cases the only items in this section are Accounts Payable and the payroll related items. Accounts Payable, like Accounts Receivable warrant a page all of their own. So does payroll. However, this area affects so much of the Current Liabilities section, that we say more about payroll liabilities here.

Payroll Taxes Payable is a big issue with companies. Even cash basis companies need to keep track of their payroll tax liability. Experience We can negotiate with the IRS regarding income taxes due. They will grant payment plans. With the right reason and the right approach, Offers in Compromise can even reduce the amount of income taxes due. With payroll taxes due, however, the IRS plays hardball. This is because this money was never the employer’s money to begin with. They deducted it from the employee’s paychecks for the IRS. Therefore there should be no reason for a company to be unable to pay. Thus the IRS view. In practice, even with the best attorneys and CPA’s in the world, it is very bad to mess with payroll taxes. Since this such a big issue, many of even the smallest businesses want to see their payroll tax liability on the Balance Sheet. Payroll tax liabilities come in three flavors: Federal Form 941 Taxes, State Income Taxes, Unemployment Taxes. The 941 Taxes are the income taxes and the social security/medicare taxes. Income Taxes are wholly deducted from the employee. The social security/medicare family of taxes are deducted and then matched by the employer. This means that you deduct a total of 7.35% from the employee’s paycheck but you pay 15.3% to the IRS. The difference between the two is Payroll Tax Expense but the total is Current Liability. State income taxes, like federal income taxes are deducted from the employee’s paycheck. Keep state income taxes in a separate account because it is a separate tax. Separate unemployment taxes into federal and state accounts, too. These accounts are paid on separate forms. Use the Federal Form 940 for Federal Unemployment Tax. The amount due will depend on the amount paid for the state unemployment in certain circumstances. To sum up, you need the following payroll tax payable accounts: Federal 941 Taxes, State Income Taxes, Federal Unemployment, and State Unemployment. Generally Accepted Accounting Principles (GAAP) requires other payroll related liabilities. Anything else that the company deducts from an employee’s paycheck is a liability. The money by law must be paid to the party for which it was deducted. On any date the company will owe wages. This liability is the difference from the date on the calendar and payday. Example Imagine if an employee just quits. You still owe him for the time he worked even though his

check is not due until payday. Not just wages, but the rest of the employee’s deductions have to be accrued, too. Experience Most of the time OCBOA financials don’t report these. Life is complicated enough. Employee benefits are current liabilities. These may include retirement plans, health insurance, bonuses and so on. Short term debt are current liabilities. This means any debt that is due within one year. If a multiyear loan is on its last year, it needs to be reclassified out of Long Term Debt to Current Liabilities. A very important item that many accountants miss is overdrawn bank accounts. If Cash in Bank has a negative balance then it is no longer an asset. It is a liability and it is a current liability. It must be reclassified from Current Assets to Current Liabilities. Title the liability account “ Bank Overdrafts”. Tip Use a reversing entry to do this. This means debit and credit the accounts so that the credit balance is in the Current Liabilities. Then in the following month do another entry that reverses this. Most software accounting programs have an automatic reversing entry feature for situations like this. Unearned Revenue is a Current Liability. Example Let’s say you engage our firm Le Moine and James as your accountants. You pay us $1,000 as a retainer. This means that we owe you $1,000 worth of work. If you weren’t expecting us to provide you $1,000 worth of services, you would never have forked over the cash to us. Of course, if you want to just give us $1,000 smackers gratis and we don’t have to do anything for it, then this accounting rule doesn’t apply. (Grin!) Another kind of circumstance where unearned revenue comes up is when the end of the period comes before the end of the job. Example We check into your hotel and pay five days in advance. The end of the month comes two days later. The accountant closes your books to provide you your monthly financials. At that point you still owe us three days because you have our money.

Unearned Revenue differs from the other liabilities in that the liability gets taken care of by time rather than payments. In the hotel example above, you wait three days, our time is up, we check out, and the liability is done. The account Customer Deposits is a form of Unearned Revenue. An important area of Current Liabilities is owner loans. Many times the Owner or Shareholders of the business must loan the company money to get by. These loans are Current Liabilities regardless of the owner’s intent. This is be the owner by definition is in control. To be conservative, accounting rules assume that the owner can pull his money out of the company at any time. The very last thing in the Current Liabilities section is “Current Part of Long Term Debt.” This will be covered in the next section.

CURRENT LIABILITIES CURRENT LIABILITIES: The current liabilities section of the balance sheet contains obligations that are due to be satisfied in the near term, and includes amounts relating to accounts payable, salaries, utilities, taxes, short-term loans, and so forth. This casual description is inadequate for all situations, so accountants have developed a very specific definition to deal with more issues. Current liabilities are debts that are due to be paid within one year or the operating cycle, whichever is longer; further, such obligations will typically involve the use of current assets, the creation of another current liability, or the providing of some service. This enhanced definition is expansive enough to capture less obvious obligations pertaining to items like customer prepayments, amounts collected for and payable to third parties, the portion of long-term debt due within one year or the operating cycle (whichever is longer), accrued liabilities for expenses incurred but not yet paid, and contingent liabilities. However, the definition is not meant to include amounts not yet “incurred.” For example, salary to be earned by employees next year is not a current liability (this year) because it has yet to be “incurred." THE OPERATING CYCLE: Remember that the operating cycle is the length of time it takes to turn cash back into cash. That is, a business starts with cash, buys inventory, sells goods, and eventually collects the sales proceeds in cash. The length of time it takes to do this is the ACCOUNTS PAYABLE are the amounts due to suppliers relating to the purchase of goods and services. This is perhaps the simplest and most easily understood current liability. Although an account payable may be supported by a written agreement, it is more typically based on an informal working relation where credit has been received with the expectation of making payment in the very near term. NOTES PAYABLE are formal short-term borrowings usually evidenced by a specific written promise to pay. Bank borrowings, equipment purchases, and some credit purchases from suppliers involve such instruments. The party who agrees to pay is termed the "maker" of the note. Properly constructed, a note payable becomes a negotiable instrument, enabling the holder of the note to transfer it to someone else. Notes payable typically involve interest, and their duration varies. When a note is due in less than one year (or the operating cycle, if longer), it is commonly reported as a current liability. THE CURRENT PORTION OF LONG-TERM DEBT is another frequently encountered current obligation. When a note or other debt instrument is of long duration, it is reported as a long-term liability. However, the amount of principal which is to be paid within one year or the operating cycle, whichever is longer,

should be separated and classified as a current liability. For example, a $100,000 long-term note may be paid in equal annual increments of $10,000, plus accrued interest. At the end of any given year, the $10,000 principal due during the following year should be reported as a current liability (along with any accrued interest), with the remaining balance shown as a long-term liability. ACCRUED LIABILITIES (sometimes called accrued expenses) include items like accrued salaries and wages, taxes, interest, and so forth. These items relate to expenses that accumulate with the passage of time, but will be paid in one lump-sum amount. For example, the cost of employee service accrues gradually with the passage of time. The amount that employees have earned but not been paid is termed accrued salaries and should be reported as a current liability. Likewise, interest on a loan is based on the period of time the debt is outstanding; it is the passage of time that causes the interest payable to accrue. Accrued but unpaid interest is another example of an accrued current liability. PREPAYMENTS BY CUSTOMERS arise from transactions such as selling magazine subscriptions in advance, selling gift-cards, selling tickets well before a scheduled event, and other similar items where the customer deposits money in advance of receiving the expected good or service. These items represent an obligation on the part of the seller to either return the money or deliver a service in the future. As such, the prepayment is reported as "unearned revenue" within the current liability section of the balance sheet. Recall, from earlier chapters, that the unearned revenue is removed and revenue is recognized as the goods and services are provided. In some cases, customers may never redeem a giftcard. In this situation, it would generally be appropriate to derecognize the liability and record revenue once it is viewed as remote that the card will ever be redeemed and the company has no obligation to remit funds to some governmental jurisdiction (as is sometimes required by law). COLLECTIONS FOR THIRD PARTIES arise when the recipient of some payment is not the beneficiary of the payment. As such, the recipient has an obligation to turn the money over to another entity. At first, this may strike you as odd. But, consider sales taxes. The seller of merchandise must collect the sales tax on transactions, but then has a duty to pass those amounts along to the appropriate taxing entity. Such amounts are appropriately reflected as a current liability until the funds are remitted to the rightful owner. OBLIGATIONS TO BE REFINANCED deserve special consideration. A long-term debt may have an upcoming maturity date within the next year. Ordinarily, this note would be moved to the current liability section. However, companies often simply renew such obligations, in essence, borrowing money to repay the maturing note. This poses an interesting question -- should currently maturing long-term debt be shown as a current or a long-term liability if it is going to be renewed by simply rolling the debt into a replacement long-term obligation? What financial statement is fair -- to show the debt as current even though it will not be a claim against current assets -- or to show the debt as long-term even though it is now due? To resolve this issue, accountants have very specific rules: a currently maturing long-term obligation is to be shown as a current liability unless (1) the company intends to renew the debt on a longterm basis, and (2) the company has the ability to do so (ordinarily evidenced by a firm agreement with a competent lender).