Module 1 - Current liabilities
Site: New Era University Virtual Learning Environment Printed by: Hannah Jane B. Velasco
Course: ACTG04-19/ACTG03-18 - Intermediate Accounting 2 Date: Tuesday, 22 October 2024, 11:33 PM
Book: Module 1 - Current liabilities
Description
Lesson 1: Title
Table of contents
1. Introduction
2. Learning Outcomes
3. Definition
4. Current vs Non Current Liabilities
5. Short-term obligations or Long term obligations. Which is which?
1. Introduction
Finding the Right Liability Insurance
Upon starting your Accountancy journey, words like accounts payable or unearned revenue become common words that are used in
conversations. But have you ever wondered if you are using these words correctly?
"Accounts payable" or "unearned revenue" are liabilities. Liabilities are something a person or company owes, usually a sum of money, and are
settled over time through the transfer of economic benefits including money, goods, or services. This is the focus of this module.
This module aims to introduce the presentation and measurement requirements of liabilities, especially current liabilities. This will help you to
classify the correct liability account that should be used in different transactions.
2. Learning Outcomes
At the end of this module, student should be able to:
1. Identify the characteristics of a liability.
2. Distinguish current from noncurrent liabilities.
3. Know the different examples of current liability.
4. Classify liability as short term or long term when refinanced.
3. Definition
Liability is something a person or company owes, that are settled over time through the transfer of economic benefits including money, goods,
or services, as a result of past events.
4. Current vs Non Current Liabilities
5. Short-term obligations or Long term obligations. Which is which?
I. How can we classify a debt to be a non-current liability even if it is originally classified as a short term obligation? Here are the two
considerations:
a. The liability is contractually due to be settled more than one year (or operating cycle, if longer) after the balance sheet date.
b. The entity has a contractual right to defer settlement of the liability for at least one year (or operating cycle, if longer) after the balance sheet
date.
II. How about a long-term debt that falls due within one year? What will be the classification of the liability?
An obligation that will be settled within twelve months after reporting date is still classified as current, even if:
a. The original term was for a period longer than twelve months.
b. There is an agreement to refinance or to reschedule payment on a long-term basis is completed after the reporting the period and before the
financial statements are authorized for issue.
III. Covenants. Breach of covenants, how will it affect the liability classification?
Covenant is a promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out or that certain
thresholds will be met.
If there are conditions relating to the borrower’s financial situation are breached, the obligation becomes immediately payable. This is
considered as current liability, because at the end of the reporting period, the entity does not have the contractual right to defer the settlement
for at least twelve months after that date.
But if the lender has agreed on or before the end of the reporting period to provide a grace period ending at least twelve months after the date,
the liability is classified as non-current.
