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

FASB Concepts Statement No. 6 has long defined liabilities as probable future sacrifices of economic benefits arising from present obligations. In December 2021 the FASB issued a revised Chapter 4 of Concepts Statement No. 8, which defines a liability more simply as a present obligation of an entity to transfer an economic benefit. The FASB removed the word 'probable' because it was often confused with the recognition threshold for loss contingencies. The IASB's 2018 framework uses almost the same wording, so the two boards now describe liabilities in nearly identical terms.

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 ASC 210 and ASC 470, current liabilities are obligations expected to be settled with current assets or by creating other current liabilities, generally within one year or the operating cycle if longer. Short-term obligations expected to be refinanced may be classified as non-current if the entity intends to refinance them on a long-term basis and demonstrates the ability to do so, either by actually refinancing after the balance sheet date but before the financial statements are issued, or by entering into a qualifying financing agreement. IFRS takes a stricter view: refinancing after the reporting date is a non-adjusting event, so the liability remains current. Lesson 4 returns to covenant breaches and waivers, where the two frameworks also differ.

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 percent.

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 US business that has nexus in a state, either a physical presence or, since the Supreme Court's 2018 decision in South Dakota v. Wayfair, sufficient economic activity, must collect state and local sales tax from customers. The tax collected is not revenue: it is credited to sales taxes payable and remitted to each state on its schedule. Unlike Canada's GST/HST, US sales taxes generally do not give businesses credits for tax paid on purchases; instead, purchases for resale are exempt under resale certificates, and tax paid on other purchases is part of their cost. Many states set economic nexus thresholds at $100,000 of sales, sometimes combined with a transaction count.

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 the United States the main statutory items for 2026 (illustrative; confirm current rates with the IRS) are Social Security tax of 6.2 percent on wages up to the $184,500 wage base and Medicare tax of 1.45 percent on all wages, together called FICA, withheld from employees and matched by employers; an additional 0.9 percent Medicare tax withheld from employees on wages above $200,000; federal unemployment tax (FUTA) of 6.0 percent on the first $7,000 of each employee's wages, reduced to an effective 0.6 percent by credits for state unemployment taxes; state unemployment tax (SUTA) at rates set by experience rating; and federal, state and sometimes local income tax withheld under the employee's W-4.

# One employee's monthly payroll in a US state (2026 rates, illustrative)
gross = 6_000.00
ss_rate, medicare_rate = 0.062, 0.0145
futa_rate, futa_base_left = 0.006, 7_000      # first month of the year
suta_rate = 0.027                             # experience-rated (illustrative)
income_tax = 1_010.00                         # federal and state withholding (illustrative)

ss = round(gross * ss_rate, 2)
medicare = round(gross * medicare_rate, 2)
net_pay = gross - ss - medicare - income_tax
futa = round(min(gross, futa_base_left) * futa_rate, 2)
suta = round(gross * suta_rate, 2)            # state wage bases vary

print(f"Gross wages                    {gross:>10,.2f}")
print(f"  Social Security withheld     {ss:>10,.2f}")
print(f"  Medicare withheld            {medicare:>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 FICA (matching)       {ss + medicare:>10,.2f}")
print(f"Employer FUTA                  {futa:>10,.2f}")
print(f"Employer SUTA                  {suta:>10,.2f}")
print(f"Total cost to the employer     {gross + ss + medicare + futa + suta:>10,.2f}")

Gross wages                      6,000.00
  Social Security withheld         372.00
  Medicare withheld                 87.00
  Income tax withheld            1,010.00
Net pay owed to the employee     4,531.00
Employer FICA (matching)           459.00
Employer FUTA                       36.00
Employer SUTA                      162.00
Total cost to the employer       6,657.00

The program shows why payroll is more expensive than the salary figure suggests. Northlake's $6,000 employee costs the company about $6,657 in the first month once employer FICA, FUTA and SUTA are added, before health insurance or paid leave. Each month Northlake owes the employee $4,531.00 and owes the IRS and the state the withholdings plus its own taxes, all current liabilities until paid. FUTA stops once an employee's wages pass $7,000, so the employer's cost per employee is highest early in the year.

Compensated absences and bonuses

Under ASC 710, an employer accrues a liability for compensated absences, such as vacation, when the employees' rights relate to services already rendered, the rights vest or accumulate, payment is probable and the amount can be reasonably estimated. Sick pay that accumulates but does not vest may be accrued but need not be. There is no federal minimum vacation requirement in the United States; vacation is a matter of employer policy, contracts and state law, and some states, such as California, require accrued vacation to be paid out at termination. Bonuses are accrued when it is probable they will be paid and the amount can be estimated, typically by year end for a plan based on that year's results.

Analyzing 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. ASU 2022-04, effective for fiscal years beginning after 15 December 2022 (with a roll-forward requirement from 2024), now requires buyers to disclose the key terms of these programs, the amount outstanding and a roll-forward of obligations.