Module 2: Current Liabilities

The Revised Conceptual Framework for Financial Reporting provides the definition of Liabilities.
Liabilities are present obligation of an entity to transfer an economic as a results of past event.
Characteristics of Accounting liability:
A. Has present obligation. It must be identified but not necessary know the payee. The payor must be
identified. Obligation arises from legal and constructive.
B. The obligation is to transfer an economic resource
The economic resource is the asset that represents a right with a potential to produce
economic benefits. The obligation must to be pay in cash, transfer non cash assets or provide service
at some future time.

C. Liability arises from a past event.(obligating event) Not recognized until it is incurred.

Measurement Initially Subsequently

Short-term Interest Bearing Face Value Face Value
Short-term non-interest bearing Face Value Face Value
Long term interest Bearing Face Value Face Value
Long term non-interest Bearing Present Value Amortized cost

Current Liabilities
A. The entity expects to settle the liability within the entity’s operating cycle.
B. The entity holds the liability primarily for the purpose of trading.
C. The liability is due to be settled within 12 months after the reporting period.
D. The entity does not have an unconditional right to defer settlement of the liability for at least 12
months after the reporting period.

Examples of current Liabilities

A. Financial liabilities held for trading
B. Bank overdraft
C. Dividends payable
D. Income taxes
E. Other non trade payable

Non- Current Liabilities- is a residual definition

It includes;
1. Non-current portion of long term debt
2. Finance lease liability
3. Deferred tax liability
4. Long- term obligation to officers
5. Long- term deferred revenue

Long term debt falling due within one year

Covenants- restriction on the borrower as undertaking further borrowings, paying dividends,

maintaining specified level of working capital and so forth.
Grace period- period within which the entity can rectify the breach and during which the lender
cannot demand immediate repayment.

Deferred revenue or unearned income- income already received but not yet earned
Current Liabilities(examples)
1. Unearned interest income
2. Unearned rental income
3. Unearned subscription revenue
Non-current Liabilities(examples)
1. Long term service contracts
2. Long -term leasehold advances

Accounting Entries
Liability Method
Cash
Unearned Income
Unearned Income
Income

Gift Certificate Payable

Gift certificate- voucher given as a present that is exchangeable for a specified cash value of goods or
service from a particular phase of business

Accounting Entries
Cash
Gift Certificate payable
Gift certificate sold
Gift certificates payable
Sales
Gift certificates are redeemed
Gift certificates payable
Forfeited gift certificate
Gift certificate not redeemed

Bonus Computations
Bonus is a financial computation that is above and beyond the normal payment expectations
of its recipient.

Bonus computation variations

1. Bonus is expressed as a certain percent of income before bonus and before tax. B=%(NI)
2. Bonus is expressed as a certain percent of income after bonus and before tax. B=%(NI-B)
3. Bonus is expressed as a certain percent of income after bonus and after tax. B=%(NI-B-T); T=%(NI-
B)
4. Bonus is expressed as a certain percent of income before bonus and after tax. B=%(NI-T); T=%(NI-B)

PREMIUM LIABILITY
Premiums are article of value such as toys, dishes, silverware, and other goods given to
customers as a result of past sales promotion activities.