Current Liabilities Part A: CURRENT LIABILITIES Liabilities -Liabilities have three essential characteristics. probable futuresacrifices of economic benefits, arising from presentobligations to other entities, resulting from pasttransactions or events. -Recall that assets represent probable future benefits.In contrast, liabilities represent probable future sacrificesof benefits. -What benefits are sacrificed? Most liabilities require the future sacrifice of cash (accounts payable, notes payable, and salaries payable). Deferred revenue is a liability that requires giving up inventory or services. Current vs. Long-Term Liabilities Notes Payable -Notes receivable is an asset that creates interest revenue. -In contrast, notes payable is a liabilitythat creates interest expense. -Note signed by a firm promising to repay the amount borrowed plus interest The borrower reports its liability as notes payable. About two-thirds of bank loans are short-term. Companies often use short- term debt because it usually offers lower interest rates than long-term debt.
-Interest on notes is calculated as: Recording Notes Payable Recording Interest Payable and Repayment of Notes Payable Key Point We record interest expense in the period in which we incurit, rather than in the period in which we payit. Line of Credit & Commercial Paper -Line of credit: Informal agreement Permits a company to borrow up to a prearranged limit Recorded similar to notes payable
-Commercial paper: Borrowing from another company rather than a bank Sold with maturities ranging from 30 to 270 days Interest rate is usually lower than on a bank loan
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