Current Liabilities
Current liabilities are those obligations that will mature and must
be paid within 12 months. The following accounts are included:
Accounts Payable
Accounts Payable are obligations due to suppliers who have provided inventory or goods and services used in operating the business. Suppliers often offer terms, such as a certain percentage off if the bill is paid within a certain time period. Whenever possible you should take advantage of payment terms as this will help keep your costs down.To analyze the company's payables position and relationship with suppliers, there is a ratio/quality indicator, similar to the one used for accounts receivable and inventory, known as Days In Payables. If the company is paying its suppliers in a timely fashion, days payable will not exceed the terms of payment.
Accrued Expenses
Accrued Expenses are obligations owed but not billed, such as wages and payroll taxes, or obligations accruing, but not yet due, such as interest on a loan. Accruals consist chiefly of wages, payroll taxes, interest payable and employee benefits, such as pension funds. As a labor-related category, it should vary in accordance with payroll policy (i.e., if wages are paid weekly, the accrual category should seldom exceed one week's payroll and payroll taxes).Notes Payable
Notes payable are obligations in the form of promissory notes with short term maturity dates of less than 12 months. Often, they are demand notes (payable upon demand). Other times they have specific maturity dates (30, 60, 90, 180, 270, 360 days maturities are typical). The notes payable always include only the principal amount of the debt. Any interest owed is listed under accruals.The proceeds of notes payable should be used to finance current assets (inventory and receivables). The use of funds must be short term so that the asset matures into cash prior to the obligation's maturation. Proper matching would indicate borrowing for seasonal swings in sales which cause swings in inventory and receivables, or to repay accounts payable when attractive discount terms are offered for early payment.
Current Portion of Long Term Debt
Current portion of long term debt is the portion of term loans due within the next 12 months. A term loan is a loan that carries a maturity that exceeds one year. It is divided into two segments; the portion due within 12 months (CLTD) and the portion due beyond one year (LTD).The non-current portion is listed below the current liability section. Like all promissory notes listed on the balance sheet, it includes the principal amount only. Any interest due is listed as an accrual.
Term loans are fundamentally different from notes payable. As sources of funds that are repaid over a period longer than 12 months, they can be used to acquire longer term assets (assets that mature to cash beyond 12 months). Term loans are often used for permanent working capital (increases in working capital due to growth) and fixed assets.
Non-current Liabilities.
Non-current liabilities are those obligations that will
not become due and payable in the coming year. There are three types of non-current
liabilities, only two of which are listed on the balance sheet:
Non-Current Portion of Long Term Debt
Non-Current Portion of Long Term Debt is the portion of a term loan that is not due within the next 12 months. It is listed below the current liability section to demonstrate that the loan does not have to be fully liquidated in the coming year. Long-term debt (LTD) provides cash to be used for a long-term asset purchase, either permanent working capital or fixed assets.Shareholder/Owner Loans
Notes payable to officers, shareholders or owners represent cash which the shareholders or owners have put into the business. For tax reasons, owners may increase their equity investment, beyond the initial company capitalization, by making loans to the business rather than by purchasing additional stock. Any return on investment to the owners can therefore be paid as tax deductible interest expense rather than as non-tax deductible dividends.When a business borrows from a financial institution, it is common for the officer loans to be subordinated or put on standby. The subordination agreement prohibits the officer from collecting his or her loan prior to the repayment of the institution's loan. When on standby, the loan will be considered as equity by the financial institution. Note that notes receivable - officer are considered a bad sign to lenders, while notes payable - officer are considered to be reassuring.
Contingent Liabilities
Contingent Liabilities are potential liabilities that
are not listed as part of the balance sheet. They are listed in the footnotes because they may
never become due and payable. Contingent liabilities include:
- Lawsuits
- Warranties
- Cross Guarantees
If the company has been sued, but the litigation has not been initiated, there is no way of knowing whether or not the suit will result in a liability to the company. It will be listed in the footnotes because while not a real liability, it does represent a potential liability which may impair the ability of the company to meet future obligations. Alternatively, if the company guarantees a loan made by a third party to an affiliate, the liability is contingent because it will never become due as long as the affiliate remains healthy and meets its obligations.
Learn more about the other sections of the Balance Sheet:
Assets
Owners' Equity
