Accounting Principles II – Current Liabilities | Accounting

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Study GuideAccounting PrinciplesII–Current Liabilities1. Liability DefinedAliabilityis a company’sdebtorfinancial responsibility. In other words, it’s something thecompanyowesto someone else.Usually, a liability means the company must give something valuable—most oftencash—to athird-party creditor(such as a supplier, bank, or lender) in order to settle the debt.Known vs. Estimated LiabilitiesNot all liabilities are the same. They can fall into two main types:•Known liabilities:These are amounts that are clearly stated and easy to measure. They arebased on things likeinvoicesandcontracts.•Estimated liabilities:These are obligations where the exact amount isnot fixed yetat thetime the company first records the transaction. The company mustestimatethe amountbecause the final value may change later.Where Liabilities Appear in Financial StatementsLiabilities are listed on the company’sbalance sheet. They are organized into two categories basedonwhen they must be paid:•Current (short-term) liabilities:Debts the company expects to paywithin the next year•Long-term liabilities:Debts that are duemore than one yearin the futureKey idea to remember:Acurrent liabilityis any obligation the company will pay offwithin the next 12 months.

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Study Guide2. Accounts PayableAccounts payableare amounts a businessowes to suppliersfor goods or services it has alreadyreceived buthas not paid for yet.These are also calledtrade payables, because they come from normal day-to-day businesspurchases.No Formal Loan AgreementAccounts payable exist because the business is trusted to pay later usinggood faith credit. Thatmeans the supplier believes the company will pay on time.A key point is thatno formal note (promise-to-pay document) is signed. So, it’s not a loan—it’ssimply an unpaid bill.Common Examples of Accounts PayableBusinesses often create accounts payable when they buy things like:•Merchandise(items to resell)•Supplies(materials the business uses)When these items are purchased“on account”(buy now, pay later), the amount owed is recordedasaccounts payable.When Does the Company Pay?Thepayment timingdepends on two main things:1.Credit termsof the purchase (the rules for how long the business has to pay)2.Whether the company can take advantage of anydiscounts offered for early paymentQuick takeaway:Accounts payable = money owed to suppliers for purchases made on credit, without signing aformal note.

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Study Guide3. Payroll LiabilitiesWhat are Payroll Liabilities?Payrollliabilitiesare amounts a companyowes because of payroll.These are different fromaccounts payable, because payroll liabilities are connected toemployeesand payroll taxes, not regular suppliers.Whenever employees work, the company becomes responsible for paying:1.Employees’ take-home pay (net pay)2.Money withheld from employees’ pay(and owed to other parties)3.Extra payroll taxes the employer must pay1) Paying Employees: Gross Pay vs. Net Pay1. Gross Earnings (Gross Pay)Grossearningsare the employee’s total paybefore any deductions.To record this, the company uses an expense account like:•Wages ExpenseorSalaries Expense2. Net Pay (Take-Home Pay)Net payis what employees actually receive on payday.It is:Gross Pay − (Required Deductions + Voluntary Deductions)This “net pay” becomes a liability because the company still owes that amount to employees until it ispaid.The liability account used is usually:

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Study Guide•Wages Payable•Salaries Payable•Accrued Wages Payable2) Payroll Withholdings = Liabilities (Not Expenses)When an employer withholds money from an employee’s paycheck, the company must later send thatmoney to the correct organization.So, withheld amounts are recorded asliabilities, because the business is onlyholding the moneytemporarily.Important point:These withheld amounts are NOT expenses of the employer.The employer is simply acting as anintermediary(middle person), collecting money from employeesand paying it to third parties.

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Study Guide3)Required vs. Voluntary DeductionsA) Required DeductionsThese are deductions the law requires the employer to take out of employee pay.Common required deductions include:1. Income Tax WithholdingThis may include:•Federal income tax•State income tax(if required)•Local income tax(if required)The amount withheld depends on:•employee earnings, and•the employee’swithholding allowancesWithholding allowances come from the employee’sW-4 form.An employee must complete aW-4before payroll can be processed.The employer usesgovernment tax tablesto calculate the correct income tax withholding, then paysthe withheld amounts to theIRS.

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