Classification of Current Liabilities: 6 Types

The following points highlight the six main types of current liabilities. The types are: 1. Accounts Payable 2. Bills (Notes) Payable 3. Interest Payable 4. Wages and Salary Payable 5. Current Portion of Long-Term Debt 6. Advance from Customers.

Current Liabilities: Type # 1. Accounts Payable:

Trade accounts payable are debts owed to trade creditors. They normally arise from the purchase of goods or services. Particular care must be exercised at the end of the accounting year to ensure that all trade payables arising from the purchase of goods and services are recorded.

Accounts payable to trade creditors may be recorded either at the gross invoice price or at the net invoice price (i.e., less cash discounts). Showing the invoice at gross is the more common practice, primarily because it is more expedient.

If this method is followed and cash discounts are material in amount, the discounts available on unpaid accounts should be recognised at the end of the period and subtracted from the liability account.

The balancing entry reduces inventories or purchases. On the other hand, if the accounts payable to trade creditors are recorded at the net amount, any discounts not to be taken must be added back to the amount payable on the balance sheet date. The balancing entry should be made to a loss accounting, because such lapsed discounts involve very high interest rates and indicate poor financial management.

Current Liabilities: Type # 2. Bills (Notes) Payable:

Although bills payable may arise from the same sources as trade accounts payable, they are evidenced by negotiable instruments and therefore should be reported separately.

The maturity date of these bills may extend from a few days to year and they may be either interest bearing or non-interest bearing. It is normally customary to record trade bills at their face value and to accrue interest on the interest bearing notes, using a separate Interest Payable Account.

Interest is sometimes subtracted from the face value of a bill when funds are borrowed from a bank or financial institution. This is called discontinuing the note, and the discount is the difference between the face value of the bills payable and proceeds from the loan.

Current Liabilities: Type # 3. Interest Payable:

Interest payable is typically the result of an accrual and is recorded at the end of each accounting period Interest payable on different types of items is usually reported as a single item. In the absence of significant legal differences in the nature or status of the interest, the amounts can be combined.

Interest in default on bonds is an example of an item sufficiently important to warrant separate reporting. Interest payable on non-current liabilities such as long term debt should be listed as current liability, because the interest is payable within the next operating cycle.

Current Liabilities: Type # 4. Wages and Salary Payable:

A liability for unpaid wages and salaries is credited when employees are paid at fixed intervals that do not coincide with the balance sheet date. Unclaimed wages that have not been paid to employees because of failure to claim their earnings should be included in salaries and wages payable.

Current Liabilities: Type # 5. Current Portion of Long-Term Debt:

Current liabilities usually include that portion of long term debt which becomes payable within the next year.

Current Liabilities: Type # 6. Advance from Customers:

Money received in advance from customers create a liability for the future delivery of goods or services. The advances are initially recorded as liabilities and are then transferred from liability account to revenue account when the goods or services are delivered.

Advance receipts from customers for the performance of services or for future delivery of goods are current liabilities only if the performance or delivery is to be completed within the time period included in the definition of current liabilities.

Advance collections on ticket sales would be considered current liabilities, whereas deposits received in two years would be a non-current liability. In some cases, customer deposits may not be listed as current liabilities because their return is not normally contemplated within the time period used to define current liabilities.

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