Current Liabilities are obligations expected to be paid within 12 months or within the company’s normal operating cycle whichever is longer. Those liabilities not within the definition of current liabilities are classified as long-term liabilities. It is important to distinguish between the two so that creditors and investors can effectively assess the risks associated with these liabilities. For instance, these users might take a look at the possibility of cash expenditures in the future, default on payments when resources available are insufficient to pay these obligations, or their impact on operational efficiency. Some common examples of current liabilities include accounts payable, notes payable, accrues liabilities, dividends payable, and income tax liability.
There are also circumstances where companies might collect monies but then record it as current liabilities. For example, a lumber company might receive an advanced payment of $100,000 from a customer for delivery of logs next month. In this case, the company hasn’t executed its part of the transaction and as such, received unearned revenue. Therefore, his journal entry will appear as:
Cash 100,000
Unearned Revenue 100,000
This unearned revenue is correctly classified as current liability as it is expected to be settled the very next month. Another example is when the company collects money from their employees for payment of taxes, insurance, or retirement by automatically withholding them from the salaries. There journal entry might debit Wages Expense and credit several current liability accounts including income taxes withheld, FICA tax withheld, retirement contributions, and health insurance.
Reference:
Spiceland, J., Sepe, J., & Nelson, M. (2010). Intermediate Accounting with British Airways Annual Report. Retrieved from
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