Financial Accounting: An Integrated Statements Approach, 2nd Edition

CURRENT LIABILITIES

When a business or a bank advances credit, it is making a loan. In these circumstances,

it is called a creditor(orlender). Individuals or businesses that receive the credit are

calleddebtors(orborrowers). Debt is an obligation that is recorded as a liability. Long-

term liabilitiesare obligations due for a period of time greater than one year. Thus, a

30-year mortgage taken out to purchase property would be an example of a long-term

liability. In contrast, current liabilitiesare obligations that will be paid out of current

assets and are due within a short time, usually within one year.

Three types of current liabilities will be discussed in this section—accounts payable,

notes payable, and payroll liabilities.

Accounts Payable

Accounts payable arise from purchasing goods or services for use in a company’s op-

erations or for purchasing merchandise for resale. For most businesses, this is often the

largest current liability. Exhibit 1 illustrates the size of the accounts payable balance as

a percent of total current liabilities for a number of different companies. The average

percent of accounts payable to total current liabilities for large companies is 35.7%.^1

Notes Payable

A second type of current liability is notes payable. A note payable may be issued when

merchandise or other assets are purchased, or a note may be issued in exchange for

cash from a bank. A note may also be issued to creditors to temporarily satisfy an ac-

count payable created earlier. For example, assume that a business issues a 90-day, 12%

note for $1,000, dated August 1, 2007, to Murray Co. for a $1,000 overdue account. The

issuance of the note is recorded as follows:

When the note matures, the entry to record the payment of the $1,000 principal

plus $30 interest ($1,000 12%90/360) is as follows:

442 Chapter 10 Liabilities

Describe and illustrate

current liabilities related to

accounts payable, notes

payable, and payroll

transactions.

1

Accounts Payable as a

Percent of Total

Company Current Liabilities

Alcoa Inc. 39%

BellSouth 16

The Gap Inc. 47

IBM 22

Nissan Motor Co. 25

Rite-Aid Corp. 51

Chevron Texaco 54

Exhibit 1

Accounts Payable as a

Percent of Total Current

Liabilities

1 Determined from analysis of public companies exceeding $10 billion in sales.

Aug. 1 Accounts Payable—Murray Co. 1,000

Notes Payable 1,000

SCF BS IS

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