Current liabilities

ACCT-211 followed Northlake Instruments, the invented maker of weather and air-quality sensor stations, through the asset side of its statement of financial position. This course turns to the other side: what the company owes and what belongs to its owners. Liabilities matter to every reader of financial statements. Lenders use them to judge whether a borrower can repay; suppliers use them to decide whether to extend credit; investors use them to understand how much of the business is financed by others and how much risk that creates. Because managers sometimes have reasons to make liabilities look smaller, the rules for when to recognize them, how to measure them and how to classify them are among the most carefully argued in accounting.

This first lesson covers the liabilities a business settles within its normal operating cycle: trade payables, short-term borrowings, the current portion of long-term debt, sales taxes, payroll and benefits, customer deposits and accrued expenses. Later lessons take up estimated liabilities (lesson 2), long-term debt (lessons 3 and 4), leases (lessons 5 and 6), income taxes (lessons 7 and 8) and pensions (lesson 9), before the course turns to equity.

What a liability is

The IASB's 2018 Conceptual Framework defines a liability as a present obligation of the entity to transfer an economic resource as a result of past events. Three ideas sit inside that definition. There must be an obligation, which can be legal (a contract or statute) or constructive (a pattern of past practice or a published policy that leaves the entity with no practical ability to avoid the transfer). The obligation must exist now, because of something that has already happened. And settling it must require the entity to give up something of value: cash, other assets or services. ASPE uses a similar definition in Section 1000, Financial Statement Concepts.

An obligation is not the same as an intention. A board decision to spend money next year on advertising creates no liability, because the company can still change its mind. A signed purchase order for goods not yet delivered is usually an executory contract: neither party has performed, so neither records an asset or liability until delivery, unless the contract has become onerous (lesson 2). By contrast, goods received before the invoice arrives create a liability at once, because the supplier has performed.

Classifying liabilities as current or non-current

Under IAS 1, Presentation of Financial Statements, a liability is current if the entity expects to settle it in its normal operating cycle, holds it mainly for trading, must settle it within twelve months after the reporting period, or does not have the right at the end of the reporting period to defer settlement for at least twelve months. Amendments issued in 2020 and 2022, effective for annual periods beginning on or after 1 January 2024, clarified the last test. The right to defer must exist at the reporting date and have substance. Management's intentions do not matter: a loan due in eight months is current even if management plans to refinance it. Covenants that must be met only after the reporting date do not affect classification at that date, but the entity must disclose information that helps users assess the risk that the debt could become repayable within twelve months. IFRS 18, which replaces IAS 1 for annual periods beginning on or after 1 January 2027, carries these classification requirements forward. ASPE Section 1510 uses a similar twelve-month and operating-cycle test.

Trade payables, notes and accrued liabilities

Accounts payable, also called trade payables, are amounts owed to suppliers for goods and services bought on credit. They are recorded when title to goods passes or services are received, at the invoice amount. Purchase discounts can be recorded using the gross method, which records purchases at the invoice price and recognizes discounts taken, or the net method, which records purchases net of available discounts and recognizes discounts lost as a finance cost. The net method better reflects the cost of the goods and highlights the expensive financing implicit in missing a 2/10, net 30 discount, which works out to an annual rate of more than 36 per cent.

Short-term notes payable are written promises to pay, often to banks. Interest-bearing notes are recorded at face value and accrue interest over time. A non-interest-bearing note carries an implicit interest charge: the borrower receives less than the face amount and records the difference as a discount that is amortized to interest expense. Lines of credit and bank overdrafts are current liabilities; under IAS 7 an overdraft repayable on demand that is an integral part of cash management may be netted with cash in the cash flow statement, but not on the statement of financial position unless the offset criteria are met.

The current portion of long-term debt is the principal due within twelve months. It is reclassified to current liabilities each year end, together with accrued interest. Dividends payable arise when the board declares a cash dividend, because declaration creates a legal obligation to shareholders (lesson 10). Accrued liabilities, also called accrued expenses, are costs incurred but not yet invoiced or paid at year end: interest, utilities, wages, professional fees and property taxes. Customer deposits and contract liabilities arise when customers pay before the entity performs; ACCT-211 lesson 4 covered their treatment under the revenue standard. Gift cards and loyalty points create contract liabilities that are reduced as they are redeemed or as breakage is recognized.

Sales taxes collected

A Canadian business registered for the goods and services tax or harmonized sales tax collects tax from customers on behalf of the government. The tax collected is not revenue: it is credited to a liability, GST/HST payable. Tax paid on business purchases is recoverable as an input tax credit, debited to a receivable or offset against the payable. The net amount is remitted to the Canada Revenue Agency monthly, quarterly or annually depending on the business's size. Provincial sales tax in British Columbia, Saskatchewan and Manitoba, and the Quebec sales tax, add separate registration and remittance obligations. Small suppliers with taxable sales of $30,000 or less over four consecutive quarters are not required to register.

Payroll liabilities

Payroll creates several liabilities at once. The employer owes employees their net pay. It also withholds amounts from employees' gross pay, such as income tax and the employee share of social insurance contributions, and owes these to the government. On top of that it incurs its own payroll taxes and benefit costs, which are an expense in addition to gross wages. The withholdings and employer contributions are current liabilities until remitted, usually within weeks.

In Canada the main statutory items for 2026 (illustrative; confirm current rates with the CRA) are Canada Pension Plan contributions of 5.95 per cent of pensionable earnings above a $3,500 annual basic exemption, up to the year's maximum pensionable earnings of $74,600, plus a second tier (CPP2) of 4 per cent on earnings between that amount and $85,000; Employment Insurance premiums of 1.63 per cent of insurable earnings up to $68,900; and income tax withheld under federal and provincial tables. The employer matches the employee's CPP and CPP2 contributions and pays EI premiums at 1.4 times the employee rate. Provincial workers' compensation premiums and, in some provinces, employer health taxes add further costs. Quebec employers deduct Quebec Pension Plan and Quebec Parental Insurance Plan premiums instead of CPP and part of EI.

# One employee's monthly payroll in Ontario (2026 rates, illustrative)
gross = 6_000.00
cpp_rate, basic_exemption = 0.0595, 3_500 / 12
ei_rate, ei_employer_factor = 0.0163, 1.4
income_tax = 1_010.00                    # from the payroll tables (illustrative)

cpp_employee = round((gross - basic_exemption) * cpp_rate, 2)
ei_employee = round(gross * ei_rate, 2)
net_pay = gross - cpp_employee - ei_employee - income_tax
cpp_employer = cpp_employee
ei_employer = round(ei_employee * ei_employer_factor, 2)

print(f"Gross wages                    {gross:>10,.2f}")
print(f"  CPP withheld                 {cpp_employee:>10,.2f}")
print(f"  EI withheld                  {ei_employee:>10,.2f}")
print(f"  Income tax withheld          {income_tax:>10,.2f}")
print(f"Net pay owed to the employee   {net_pay:>10,.2f}")
print(f"Employer CPP                   {cpp_employer:>10,.2f}")
print(f"Employer EI                    {ei_employer:>10,.2f}")
remit = cpp_employee + ei_employee + income_tax + cpp_employer + ei_employer
print(f"Total remittance to the CRA    {remit:>10,.2f}")
print(f"Total cost to the employer     {gross + cpp_employer + ei_employer:>10,.2f}")

Gross wages                      6,000.00
  CPP withheld                     339.65
  EI withheld                       97.80
  Income tax withheld            1,010.00
Net pay owed to the employee     4,552.55
Employer CPP                       339.65
Employer EI                        136.92
Total remittance to the CRA      1,924.02
Total cost to the employer       6,476.57

The program shows why payroll is more expensive than the salary figure suggests. Northlake's $6,000 employee costs the company about $6,477 a month once employer CPP and EI are added, before workers' compensation, health benefits or vacation pay. Each month Northlake owes the employee $4,552.55 and owes the CRA $1,924.02, both current liabilities until paid.

Compensated absences and bonuses

Employees earn paid vacation as they work. IAS 19 treats accumulating paid absences, those that can be carried forward if unused, as a liability measured at the additional amount the entity expects to pay because of unused entitlement at the reporting date. Non-accumulating absences, such as sick days that lapse, are recognized only when taken. Provincial employment standards set minimum vacation: in Ontario two weeks after each year of employment, rising to three weeks after five years, with vacation pay of at least 4 or 6 per cent of wages. Bonuses and profit-sharing are accrued when the entity has a present legal or constructive obligation and can estimate the amount reliably, which usually means by year end for a plan based on that year's results.

Analysing short-term liquidity

Readers use current liabilities to assess liquidity. The current ratio divides current assets by current liabilities; the quick ratio divides cash, short-term investments and receivables by current liabilities; and days payable outstanding, accounts payable divided by cost of sales times 365, shows how long the company takes to pay suppliers. A company can improve these ratios at year end by paying down payables just before the reporting date, delaying purchases or, where the framework allows, reclassifying debt as non-current. Readers should therefore look at the notes on refinancing, covenant compliance and the maturity analysis of financial liabilities that IFRS 7 requires, and US companies disclose under ASC 470 and SEC rules.

Supplier finance arrangements, sometimes called reverse factoring, deserve special attention. A bank pays the company's suppliers early and the company pays the bank later, often on extended terms. The company's operating cash flow looks stronger because payments to suppliers become payments to a bank. Amendments to IAS 7 and IFRS 7, effective for annual periods beginning on or after 1 January 2024, now require disclosure of the terms of these arrangements, the carrying amounts involved and the range of payment due dates.