Definition Paper on Current and Long-term Liabilities

2021-05-28 04:14:44
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549 words
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Wesleyan University
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Essay
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By definition, a liability refers to an obligation to provide or pay future services for a given item that was provided or agreed upon (Clauss, 2010: 113). Current and long-term liabilities are the two main liabilities that exist in the financial statements.

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Current Liability

Current liability refers to an obligation that a company anticipates to settle payment or provided services over a given short term period by using the assets that are recognized on its present balance sheet (Baker & Powell, 2005: 108). Examples of current liabilities include salaries, taxes, accounts payable, deferred revenues and bank account overdrafts. In order to assess the company ability to meet these obligations, the financial statement is used to determine the solvency status of the company (Bragg, 2004: 97).

Long-term Liabilities

Long-term liability on the other hand, refers to the obligation that the company anticipates to pay or provide services over a period of more than one year. Usually, these type of liabilities are formalized via paperwork which lists the underlying terms like the interest payments, principal amounts, among others when income is due (Baker & Powell, 2005: 122). Examples of long-term liabilities include notes payable, bank loans, mortgages, bonds payable and pension payable.

Journal Entries for Liabilities

The following example can be used to illustrate current and long-term liability journal entry.

Abacus Trading Company completed the following transactions during the month of December 2015. Prepare journal entries illustrating the effects of every transaction made during the period.

1st Dec: Made initial investment of cash $30,000.

Dec. 2nd: Secured a bank loan worth $70,000.

Dec. 4th: Purchased truck for $15, 000 through cash payment of $8,000 and a note payable for balance.

Dec 5th.Rent expenses for December were $1000

Dec 6th: Made a credit purchase from Smitsan Co. for $9,000.

Dec. 13th: Credit sales to Amiliton Group for $4,000

Dec. 15th: Secured 30 year mortgage for $40,000

Dec. 26th: Paid staff salary amounting to $52,000

Dec. 28th: Paid pension for $20,000

Dec, 28th: Secured a corporate bond for $70,000 with annual interest rate of 6% payable at the end of the period with a discount of 2%.

The table below is a journal entry specifically for the current and long term liabilities for the case above.

Table 1: Current and long term liabilities Journal Entries

Date Particulars L.F Dr. Cr.

2nd Dec. Cash

Bank loan* $70,000 $70,000

4th Dec. Truck

Cash

Notes payable** $15,000 $8,000

$7,000

5th Dec. Rent expenses*

Cash $1,000 $1,000

6th Dec. Purchases

Accounts payable Smitsan Co.* $9,000 $9,000

15th Dec. Cash

Mortgage** $40,000 $40,000

26th Dec. Salary expenses*

Cash $52,000 $52,000

28th Dec. Pension expenses**

Cash $20,000 $20,000

28th Dec. Interest expense**

Discount on bonds payable**

Cash $4,258.33 $85.17

$4,998.16

Note:

Current liabilities - *

Long term liabilities - **

As exhibited under table 1, both current and long term liabilities are presented as an obligation that the company should meet at the agreed period.

Conclusion

The paper offers a review of critical components of the balance sheet. Liabilities form an important part of financial statement and should be accurately reported to ensure that the financial statements serve the purpose for which they are intended. Failure to acknowledge liabilities under their respective category causes misrepresentation of the company information. Current liabilities should be appropriately posited to help the management understand their short term application. The same applies to long term liabilities.

References

Baker, H. & Powell, G. (2005). Understanding financial management: a practical guide. Malden, MA: Blackwell Pub.

Bragg, S. (2004). Accounting for payroll: a comprehensive guide. Hoboken, N.J: John Wiley & Sons.

Clauss, F. (2010). Corporate financial analysis with Microsoft Excel. New York: McGraw Hill.

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