Current liabilities

A liability that is owed to a corporation on an annual basis is referred to as a current liability. In this situation, the list of liabilities that contain the current liabilities is closely monitored so industry should demonstrate sufficient liquidity to ensure that the liabilities are remunerated off while they are in arrears. Other liabilities, on the other hand, are known as long-standing liabilities, which are often available in a group below the balance sheet after current liabilities.
In rare cases, the operational phase of a company may last longer than a year. As a result, the corporation must pay existing obligations that are due during the operational period. In this case, the operational cycle is the period necessary for a business to obtain inventory, make sales on it and transform the sales made to be in cash.

Existing liabilities are mainly salaried by discharging the existing present resources. In cases where the current liabilities are represented by a significant amount, it calls for attention for there to be an approximately equal size and probable liquidity which can offset the amount. Settlement of liabilities can likewise be done through replacement with alternative liabilities like the short-range debt.

The existing liabilities act as a vital component on numerous measures of short-range liquidity in the industry. They include:

Current ratio- refers to the present resources divided by the existing liabilities.

Quick ratio-Refers to the present assets deducting the inventory and dividing by the present liabilities.

Cash Ratio-It refers to cash and cash equivalents by dividing by the current liabilities.

For the listed ratios, a bigger ratio depicts a large level of liquidity. Therefore, the company needs to have a heightened capability for a given business to encounter its short-range liabilities.

Below are the some examples of current liabilities:

Accounts Payable

Accounts payable lies in the current liabilities and can be depicted when a company buys goods on credit and requires to be paid back in a short while. It can be classified among the short-term debts which need to be paid and avoid default. Accounts payable is counted as a liability since a particular creditor provides goods and services without cash payment meaning that the buyer bought goods on credit. Surprisingly, someone like you and I has accounts payable.

Everybody consumes broadband and electricity as well as a TV network. Towards the end of the month, these bills accumulated until the billing process occurs. It translates to a service provider giving you service and sending you a bill that needs to be paid on a certain day or else a default takes place. It becomes accounts payable.

From the company's viewpoint, company A can purchase goods from company B on credit. However, the amount required to pay for the goods need to be paid by 30 days. In company B, the same amount will be recorded as accounts receivable while A records it as accounts payable. It is because company A has to pay an amount that is due to company B.

In accounts methodology, accounts payable will be treated as a sale, but on the contrary, money has not been delivered. In this case, the department dealing with accounts needs to be careful when printing transactions related to the liability. When closing such a deal, time is of essence considering that this liability is short-term. Accuracy also is required since the amount paid need to match the name of the supplier. It is because accuracy will determine the cash position of the company (Bennet Coleman, 2017).

Sales taxes payable

It can be described as a liability account where the aggregate amount of taxes that arise from sales collected from buyers on behalf of the government is stored. The business in discussion acts as the custodian of the funds and is supposed to remit them to the tax authorities at varied times. In some cases, the government may require the tax to be paid on a monthly basis while to some; the amount should be paid quarterly a year.

From the taxes collected, it is clear that the sales taxes payable can be divided into different accounts that contain the sales that apply to a particular government entity. For instance, one of the accounts can store sales taxes for a government while the other one can be used by the county government. If a company is entitled to collecting taxes for many jurisdictions in the government, it can mean that a company can potentially store sales tax payable in large accounts.

The sales taxes payable account is usually considered as a short-term liability since most of the times the funds are released once a year. Archetypally, the account is combined with the accounts payable balance and outlined on the balance sheet.

The government jurisdictions may send their auditors to a given business at varying times and examine the contents in the sales taxes payables account. If a business has not been calculating sales taxes well, the company can be penalized (Bragg Steven, 2017).

Income Tax Payable

This is a liability that a company incurs based on the level of probability related. This type of tax can be paid to a government jurisdiction such as the federal government where the entity lies. Immediately the business pays income tax; the liability is usually eliminated. To act as an alternative, income tax can be reduced through application of the offsetting credits. In this case, a company is required to pay close attention to the credits available that can be paid to the income tax payable.

The income tax payable is not usually based on accounting profit which is recorded in business. In this case, there might be some adjustments which are allowed by the government which alters with the accounting profit resulting in taxable profits against the tax rates. Adjustments which are made may be as a result of the timing difference between the profits realized and tax reporting. For instance, if the government allows the use of augmented depreciation to calculate income tax, it delays the payment of taxes to a later day (Bragg Steven, 2017).

Interest payable

The cost of funds which are invested in the business by a lender and is as well recognized during the accounting period is referred to as interest expense. The total expense can be typically expressed as a percentage of the outstanding principal. Interest payable can be calculated as:

(Number of days funds were borrowed divided by the number of days in a year) multiplied by the interest rates and principal

The lender in this case bills out the borrower. When an invoice is received by the borrower, the usual accounting entry is debited to interest expenses and some amount of credit to the accounts payable. The borrower has a responsibility to set up a journal entry as a retrogressive entry. This is done so that the entry automatically reverses when the next accounting period reaches. Consequently, when the lenders invoice arrives, a borrower can record it in such a way that it is noted.

However, if the period indicated by the invoice from a lender does not match with the dates recorded in the accounting period of the borrower, the borrower is expected to accrue an increased interest which is not included in the invoice.

Interest expense is the tax-deductible expense which in such a case makes there to be a low debt funding in comparison to equity. Nonetheless, an excess amount of debt can cause risk due to corporate failure when the borrower is not able to manage the debt accountabilities. For this reason, a strategic management team usually incurs a modest amount of the interest expense in response to the assets (Bragg Steven, 2011).

Cash Overdraft

A bank which shows an undesirable balance can be described as a cash overdraft. Such a type of situation occurs when an industry is positive in clearance of funds that are deposited in the bank and are ready for use. For this reason, the bank writes a check for the funds which have not yet been availed. Such cases do occur when the reconciliation in a bank is not updated in the right manner, therefore, a belief that the bank has more cash is birthed but in the real sense, it is not.

Bank account overdraft occurs when a bank accepts checks, but in the real sense, there is no cash in the account. Moreover, the bank advances some funds to the associated bank account to compensate the checks for a shortfall. In this case, the funds need to be paid after a specified period failure to which the bank charges more interest on the funds. Additionally, a large amount of overdraft fee will also be charged. When a bank is in a cash overdraft condition mainly during the reporting period, it will record the overdraft amount being a short-range liability.

In response to a cash overdraft, the bank might shift some money from a different account to store the total sum of the overdraft. In such an occasion, no loan is recorded in the bank nevertheless the company will be charged an overdraft fee for the transfer of the funds. For this reason, a company should, therefore, transfer the funds to its accounting accounts from the floated account to match the movement of money officiated by the bank (Bragg Steven, 2013).

Accrued Expenses

Any incurred expenses can be termed as an accrued expense which is not yet documented as expenditure. In cases where expenditure documentation is involved, a journal entry has to be created to record any accrued expense as well as offset any liability, therefore, is classified as a current liability. When a journal entry is not involved, the incurred expense will not appear in the individual financial details for the incurred time. This would there result in announced profits being higher in that time. In simple terms, accrued expenditures are usually recorded to escalate financial statements accurateness so that the expenses can be narrowly associated with profits that they are incorporated in.

The reverse of an accrued expense is the prepaid expenditure since a liability is usually paid beforehand the precedented period or when the asset has been spent already. For this reason, a prepaid asset is bound to appear on the balance sheet like an asset (Bragg Steven, 2017).

Some of the accumulated expense include:

-Interest being charged on loans whereby no invoice from the lender has been received

-The goods and services that have already reached the consumer but no invoice from the supplier have been received.

-The taxes that have been incurred and not any invoice has been received from the government entity.

-Salaries that have been used but employees have not been paid yet.

Let's take for instance where a company has received some provisions from a supplier at the close of the month, but during this period, no invoice has been received yet. Moreover, the company closes its book for that month. For this expense to be recorded in a monthly receipt, the staff dealing with accounting records the expense in the supplies expenses accounts with the expected deduction in the money to be allocated by the seller. The staff also records the credit to any accumulated expense in any liability account.

In the real sense, the sum of money that is to be accrued is primarily an approximation and is highly probable to be somehow dissimilar from the total the seller quotes in the invoice that comes later. Subsequently, there is an additional sum of expense which is recognized in the following month. This is done after the reversal of journal entry is done, and the amount quoted in the supplier invoice is netted.

Practically, expenses that are not in material form are not subjected to accruement since more work is required to create a documented entry journal. Furthermore, if a large number of expenses is to be accrued, there will be a slow-down in the closing process.

Some of the journal entries involved in accrued expenses include:

-Supplies received by the office and no invoice has been sent by the end of the month.

-Some hours worked by an employee, but no wage has been paid at the end of the month.

-Benefit liability that is incurred yet no supplier invoice at the end of the month.

-Income taxes based on the income earned is accrued.

Customer Deposit

Cash that is to be paid by a customer to a company which has not delivered goods or services is referred to a customer deposit. For this case, the company must provide the services and goods that are indicated and is not supposed to return any funds.

The cases where customer deposits are used include:

-When a customer has a bad credit record, and for this reason, the company requires him to pay before.

-When goods being ordered are very expensive for any company to produce and therefore a deposit is needed from the customer for production fee to be made.

-When the goods needed by the customer are to be custom made from their specifications and once sold cannot be resold, or the customer reneges the purchase order.

-When a customer opts to reserve the goods in a subject without any delivery.

In this case, the company which should receive customer deposit records it as a liability. However, when the company performs under the signed contract with the customer, the liability account is debited to eliminate any liability. Additionally, revenue is credited for sale. This occurs when the goods and services are delivered over a certain period.

When a company receives the deposit from a customer, it does not incur any sales tax. Such a liability can be created the company immediately delivers in the signed contract, and the deposit is converted into a transaction.

The reason as to why customer deposit is classified under the current liabilities is because a company provides goods and services as the deposit is being made. If the deposit is to be paid for a longer period more than a year, the customer deposit will be classified under the long-term liabilities (Bragg Steven, 2017).

Conclusion

The current liabilities are essential in matters of the financial accounting system. With the listed examples and explanations above, I have tried to discuss the important elements briefly. From the discussion, we can obtain an in-depth understanding of current liabilities. In the balance sheet, current liabilities are taken into consideration which reflects the financial position of a company. Sometimes, the balance sheet helps to compare the financial position of the company over the years. Therefore, current liabilities are essential in depicting the progress of the company (Surbhi s, 2014).

















References

Bragg Steven. “Cash Overdraft”. Accounting tools, June 11, 2013. [Online] Accessed at: https://www.accountingtools.com/articles/what-is-a-cash-overdraft.html [Retrieved Dec 11, 2017]

Bennet Coleman. “Accounts Payable”. Economic Times, Sept 14, 2017. [Online] Accessed at: https://economictimes.indiatimes.com/definition/accounts-payable [Retrieved Dec 11, 2017]

Surbhi s.” Differences between Assets and Liabilities”. Key differences, Dec 8, 2014. [Online] Accessed at: https://keydifferences.com/difference-between-assets-and-liabilities.html [Retrieved Dec 11, 2017]

Bragg Steven. “Income Tax Payable”. Accounting tools, May 12, 2017. [Online] Accessed at: https://www.accountingtools.com/articles/2017/5/12/income-tax-payable [Retrieved Dec 11, 2017]

Bragg Steven. “Sales Taxes Payable”. Accounting tools, Oct 4, 2017. [Online]Available at: https://www.accountingtools.com/articles/sales-taxes-payable-definition-and-usage.html [Retrieved Dec 11, 2017]

Bragg Steven. “Interest Expense”. Accounting tools, May 9, 2011. [Online] Available at: https://www.accountingtools.com/articles/what-is-interest-expense.html [Retrieved Dec 11, 2017]

Bragg Steven. “Accrued Expenses”. Accounting tools, July 9, 2017. [Online] Available at: https://www.accountingtools.com/articles/what-are-accrued-expenses.html [Retrieved Dec 11, 2017]

Bragg Steven. “Customer Deposit”. Accounting tools, March 6, 2017. [Online] Available at: https://www.accountingtools.com/articles/what-is-a-customer-deposit.html [Retrieved Dec 11, 2017]