Current Liability is the amount owed that is expected to be paid within one year or the company’s operating cycle, depending on whichever is longer. Examples of current liabilities typically include accounts payable, short term notes, wages payable, taxes payable, and unearned revenue. The most common type of current liability is accounts payable.
Accounts payable
It is recorded when goods or services are purchased from a supplier on credit. An invoice from a supplier that is due within 30 days is similar to a 30-day interest-free loan from the supplier. As a result, it is considered accounts payable.
Example 1:
X company purchases supplies on credit from Y company on July 15th. Y company invoices X company for $900, and the payment is due on August 15th (In 30 days).
The $900 becomes an account payable on X company’s balance sheet on July 15th. Since the accounts payable is due within 30 days, it is reported as a current liability on the balance sheet. The journal entry would be as follows:
July 15
Debit Credit
Supplies $900
Accounts Payable $900
To record purchase of supplies
At times vendors offer discounts for early payments. In this example, the Y company could offer X company a 2% sales discount if payment is received within ten days. In other words, 2/10 net 30. If X company takes advantage of this discount by making an early payment, the journal entry now would be:
July 22
Debit Credit
Accounts Payable $900
Cash $882
Sales Discount $18
As you can see, the remaining credit would be to a discount account, which is effectively an income statement gain account.
Current Portion of Long-Term Debt
Some long-term debts, such as mortgages and notes payable, may be payable in a series of monthly installments depending on the terms of the agreement. With these long-term debts, there is often a portion of the principle that is due within one year; that portion is considered a current liability. The remainder of the obligation continues to be classified as long term liability.
Note Payable
Borrowed funds or a loan from a financial institution. It is a source of financing with an obligation to pay back the amount borrowed at a future date. Note payable states the amount borrowed, the due date for repayment, and the interest rate. The Note could be long term or short term depending on when the principal must be paid back.
