(1AA3) Chapter 7 - Current Liabilities

Liabilities (according to IFRS)

Something your business already owes

Can be paid by:

• Cash

• Give another asset

• Deliver goods or services you own (i.e unearned revenue)

• Converted to shares (creditor accepts equity instead of cash)

Current liabilities

Obligation due within one year or within a company's operating cycle 

Operating cycle

• The time it takes for a company to convert its investments in inventory into cash flows from sales

• Typically is one year 

Types of current liabilities

• Known amounts

• Provisions (less certainty about timing or amount)

Types of known current liabilities

• Accounts Payable

• Accrued liabilities

• Income tax payable

• Unearned revenue

• Current portion of long-term debt

• Payroll liabilities

• Sales tax payable

• Short-term notes payable

• Dividend Payable 

Accounts Payable

Amounts owed to suppliers

Accrued liabilities

• Expenses incurred (used), but not paid

  • insurance payable

  • Rent

  • payable

  • Interest payable

Unearned revenue / Deferred revenue

• Cash advances from customers for services that have not been delivered yet

Current portion of long-term debt

• Business has a debt that is due after 1 year

• Long-term liability on the balance sheet

• As time passes, the business must reclassify the portion of debt into a current liability 

Payroll liabiliites includes;

• Payroll deductions

• Payroll expenses

Payroll deductions

• Paid by employers to the government on behalf of employees

• Income taxes 

• Canada Pension Plan (CPP)

  • Retirement fund

• Employment Insurance (EI)

  • Security in case they lose their job at some future date 

Payroll expenses

• Salary expenses

• Canada Pension Plan (CPP)

  • Employer's CPP contribution = Employee CPP contribution  

• Employment Insurance (EI)

  • Employee EI contribution x 1.4

Why are Income taxes, CPP and EI considered a liability?

• The liabilities will remain in the books until the company pays the money to the government

  • Hence why they owe this, making it a liability

Sales tax payable

The tax added to purchases when shopping 

3 Types of Sales Tax Payable 

• Goods and services tax (GST)

• Provincial/regional sales tax (PST)

• Harmonized sales tax (HST)

Harmoinized sales tax (HST)

• Ontario only has HST

  • HST combines GST and PST = 13% in Ontario

• Value-added sales tax

  • Businesses that buy a product and resell it for a profit will receive an input tax credit (ITC) for the HST they paid

Input tax (or Tax recoverable)

Tax paid when purchasing goods

Output Tax (or Tax payable)

Tax collected when selling goods or services 

Notes Payable and Notes Receivable (OR promissory notes)

• Written promise to pay a sum at the maturity date 

  • Plus interest

Why are notes payable and notes receivable issued?

• Gives the lender stronger legal protection

• The borrower signs it, the lender keeps it as proof

Example of issues N/R/NP

Dates in which journal entries should be made for notes payable/receivable

1. Initial transaction

2. End of accounting period

3. First interest payment date

4. Final payment

Interest 

• The cost of borrowing money

• Stated as an annual percentage date 

Maturity date

The date at which the debtor must pay the note

Principal

The amount of money borrowe dby the debtor

Term

The length of time the debtor must repay the note