Liabilities are claimed against the company’s assets. As with assets, these claims record as current or noncurrent. Usually, they consist of money the company owes to others. For example, the debt can be to an unrelated third party, such as a bank, or to employees for wages earned but not yet paid. Some examples are accounts payable, payroll liabilities, and notes payable.
Presenting both assets and liabilities as current and noncurrent is essential for the user of the financial statements to perform ratio analysis.
Current liabilities on the balance sheet
Current liabilities are ones the company expects to settle within 12 months of the date on the balance sheet. Settlement comes either from the use of current assets such as cash on hand or from the current sale of inventory. Settlement can also come from swapping out one current liability for another.
At present, most liabilities show up on the balance sheet at historic cost rather than fair value. And there’s no GAAP requirement for the order in which they show up on the balance sheet, as long as they are properly classified as current.
The big-dog current liabilities, which you’re more than likely familiar with from previous accounting classes, are accounts payable, notes payable, and unearned income. Keep in mind that any money a company owes its employees (wages payable) or the government for payroll taxes (taxes payable) is a current liability, too.
Here’s a brief description of each:
Short-term notes payable: Notes due in full less than 12 months after the balance sheet date are short term. For example, a business may need a brief influx of cash to pay mandatory expenses such as payroll. A good example of this situation is a working capital loan, which a bank makes with the expectation that the loan will be paid back from collection of accounts receivable or the sale of inventory.
Accounts payable: This account shows the amount of money the company owes to its vendors.
Dividends payable: Payments due to shareholders of record after the date declaring the dividend.
Payroll liabilities: Most companies accrue payroll and related payroll taxes, which means the company owes them but has not yet paid them.
Current portion of long-term notes payable: If a short-term note has to be paid back within 12 month of the balance sheet date, you’ve probably guessed that a long-term note is paid back after that 12-month period. However, you have to show the current portion (that which will be paid back in the current operating period) as a current liability.
Unearned revenue: This category includes money the company collects from customers that it hasn’t yet earned by doing the complete job for the customers but that it anticipates earning within 12 months of the date of the balance sheet.
Noncurrent liabilities on the balance sheet
Noncurrent or long-term liabilities are ones the company reckons aren’t going anywhere soon! In other words, the company doesn’t expect to be liquidating them within 12 months of the balance sheet date.
Bonds payable: Long-term lending agreements between borrowers and lenders. For a business, it’s another way to raise money besides selling stock.
Long-term leases: Capital leases (you record the rental arrangement on the balance sheet as an asset rather than the income statement as an expense) that extend past 12 months of the date of the balance sheet. Because the rental arrangement is recorded as an asset, the related lease obligation must be recorded as a liability.
Product warranties: Report as noncurrent when the company expects to make good on repairing or replacing goods sold to customers and the obligation extends beyond 12 months from the balance sheet date.
