Current Liabilities in Accounting
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Current Liabilities in Accounting
Upon the initiation of the “Principles of Accounting I” course I was very nervous because accounting is not one of my strongest subjects. I was unsure on what to expect; accounting is such a meticulous and vast field that upon seeing and flipping through the material at the beginning of the course, I immediately understood it would involve lots of information as well as time and dedication in order for me to understand the material and become knowledgeable of the accounting principles. Throughout the course I gained knowledge on many different terminologies pertaining to accounting as well as to acknowledge how crucial accounting is in everyday life, business, as well as in the corporate world. In the following I will discuss and explain how the following types of current liabilities should be accounted for as well as give examples. In addition I will also explain in detail current liabilities of known amount, current liabilities that must be estimated and lastly contingent liabilities.
Accounting is very important in many ways in todays business world. If people really stop and think about the importance of accounting in everyday life. People will actually notice that it can be applied or utilized in any employment industry, thats how crucial accounting is in todays world. There are many ways accounting makes an impact in businesses. For example, if it wasnt for accounting how would businesses be able to keep account on how the company is doing financially? According to Horngren, Harrison, & Oliver (2012), “Accounting is the information system that measures business activity, processes the data into reports, and communicates the results to decision makers.” (P. 2). Accountants play a crucial role in the stability and relevance of many businesses. Companies that do not have accountants or owners that do not have the knowledge of accounting have the possibility of going bankrupt, so it is imperative for companies/businesses to have an accountant or accountants on their staff in order to keep their financial records in order. Accounting is what makes and allows businesses to grow and flourish in these hard economic times.
In accounting there are liabilities that many businesses have to account for like Account for current liabilities of known amount, Account for current liabilities that must be estimated, and contingent liabilities. Liabilities are obligations that company/businesses have to pay to another party. In an organizations balance sheet a liability can be a lawful debt or an accrual, it is basically an estimate of an obligation that a company/organization has to compensate to another party. There are several liabilities in accounting. One type of liability that exists in accounting is current liabilities of known amount. Current liabilities of known amount are liabilities where amounts are usually known and must be paid in a year (12 months) or the functioning cycle (Horngren, Harrison, & Oliver, 2012).
Liabilities that have to be paid in a year or less or the functioning cycle are as followed. Lets begin with accounts payable. Accounts payable is a current liability that accounts for sums payable for goods or services bought on account. Accounts payable are expected on average of thirty days, which is why the liability is current. Short-term notes payable are promissory notes that need to be paid in twelve months (a year). The interests on the notes are essentially paid at the state of being fully grown or developed. In short-term notes payable you would want to credit the note payable for the initial sum of the note and the currency gained would be equivalent to the initial sum of the note (Inventory, money in cash and notes payable). If for some reason the note is paid in the following accounting interval an adjusting entry should be chronicled in order to accumulate the interest at the conclusion of the existing period (Interest expense, interest payable). Next, an entry is made when the note is paid in the proceeding accounting period. For example, note payable, interest expense, interest payable, and cash should follow the next in the order written. If short-term notes payable are given at a markdown the interest is then subtracted from the stated value of the note (Horngren, Harrison, & Oliver, 2012).
Sales tax payable accounts for the sales taxes that are gathered by vendors (businesses) and that need be occasionally submitted to the government. According to Horngren, Harrison, & Oliver (2012), “To pay the tax, the company debits Sales tax payable and credits cash.” (P. 499) Sales taxes can be chronicled at every sale; account receivable (cash) is debited, while the revenue from sales and sales tax payable are credited. If vendors choose to not chronicle the sales tax every time a purchase occurs, then occasionally an entry to adjust sales revenue is made. The entry should be recorded as such, accounts receivable (cash) entry in debit and an entry in credit for sales revenue.
According to Horngren, Harrison, & Oliver (2012), “The current portion of notes payable (also called current maturity) is the principal amount that will be paid within one year a current liability.” (P. 499). To fully explain the current portion of long term debt, for instance, suppose that