⋆.𐙚 ̊ accounting [chapter nine]: current and long term liabilities

current liabilities

a debt a company expects to pay:

• within one year or

• within the company’s operating cycle (the time it takes to turn inventory into cash)

how are current liabilities paid?

using current assets (like cash) or by creating new current liabilities

examples of current liabilities

• notes payable (short-term loans)

• accounts payable (money owed to suppliers)

• unearned revenue (money received before doing the work) 

• accrued liabilities (expenses owed but not yet paid, like wages, taxes, and interest) 

long term liabilities

debts the compay will pay after one year or later

examples of long term liabilities

• bonds payable

• long term notes payable

• leases (renting equipment or property)

• deferred taxes (taxes owed later) 

notes payable 

used when borrowing money, can be short term or long term, if due within one year, it’s a current liability

sales tax payable

when you buy something, the store collects sales tax for the government. the store sends it to the state later

how sales tax payable work

1. customer pays sales price + tax

2. company collects the tax and owes it to the state

3. company records it as a sales tax payble liability 

example of sales tax payable problem

if you buy something for $10,000 and the sales tax is 6%:

sales tax = 10,000 × 6% = $600

total cash collected = $10,600

• 600 is the liability until company sells it to the state

when sales tax isn’t listed seperately

sometimes stores only show one total, to find the sales tax you need to use a formula

finding sales tax formula

total reciepts / (1 + sales tax rate) = sales

example of non-seperate sales tax

total receipts = $10,600

sales tax rate = 6% (0.06)

10,600/1.06 = 10,000 (sales)

sales tax = 10,600 - 10,000 = $600

unearned revenue

money received before doing the work or giving the product, considered a liability until work is done

example of unearned revenues

a gym receives $600 for a one year membership

recording unearned service revenues

• at first: record unearned revenue (they owe serves)

• each month: record part of it as revenue when service is provided

current maturities of long term debt

part of the long-term loan that must be paid this year

is a current maturity of a long term debt recored as a current liability?

yes, no adjusting entry is needed, it’s shown seperately on the balance sheet

example of current maturities of long term debt

if a 5,000 loan is paid in 1,000 yearly parts, the next 1,000 due is the current maturity 

payroll and payroll taxes payable

when a company pays employees, two types of liabilities happen

1. withholding liabilities (from employees)

2. employer payroll taxes

withholding liabilities

the company takes money out of paychecks for

• income taxes

• fica (social security and medicare)

the company must send this money to the government later, it’s a liability until paid 

employer payroll taxes

company also pays its own share of certain taxes, including

• employer share of fica taxes

• state unemployment tax

• federal unemployment tax

these are extra costs for the employer, not employees