Identifying and reporting liabilities in financial reporting

Identifying and reporting liabilities in financial reporting

Abstract

This paper is based solely on recording and reporting liabilities in financial reporting. It discusses in detail difference between current and long term liabilities, method of calculating interest expense on short term borrowing, journal entries of recording accrued liabilities, recording of contingent liabilities and disclosures requirement for contingent liabilities.

Introduction

Liabilities are regarded to be financial obligations to outside individuals and organizations as a result of events and transactions on or before the accounting date. Liabilities is an outcome of agreements, contracts and legislation in force at the accounting date that require to pay for the product and services and to repay borrowings provided before the accounting date. The liabilities usually comprises of accounts payable, accrued salaries, accrued wages, public debt, superannuation, interest payable, etc. The liability component is a very important financial structure of any company, since the liability is usually finances the working capital required to operate the company, so the company must manage well these liabilities.

Difference between current and long-term liabilities

A long-term liability is regarded to be those debts which are to be paid for more than one year. Current liabilities refer to liabilities that the company must pay within a period not exceeding one year. The liabilities of a company are classified into those long-term liabilities and current liabilities, i.e. debts that are due in the short term, which are known as current liabilities.

Normally current liabilities includes amount which is paid within duration of upcoming year that is indirectly related to the costs of production because of the reason that companies may stop themselves from making widgets, but could still required to make lease payments. Companies having long-term liabilities whose payments comprises of principal will rarely show the principal portion of the long-term liabilities which is to be paid within current liabilities in the current year and reduces long-term liabilities by removing principal payments from it.

Current liabilities are liabilities which are paid off in short-term duration and Long-term liabilities are paid off in long-term duration.

Examples of current liabilities includes, accounts payable; interest expenses; accrued expenses such as wages, public debt, taxes; short-term notes; cash dividends; and revenues gather before hand in advance of actual delivery of goods or services. Examples of long-term liabilities includes, deferred liabilities including deferred income tax payable, lease obligations, mortgages, long-term notes, pensions, and several postretirement benefits.

Proper and accurate estimation and accounting of all current liabilities are essential in order to neglect overstatement of long-term liabilities, assets or net income. Further, it is necessary to differentiate between current and long-term liabilities in order to estimate accurate working capital. Further, it is also required to distinguish among them and to keep proper record of current liabilities in order to prepare meaningful cash budgets.

Calculation of the interest expense on short-term borrowing

Interest expense is considered to be vital factor in business application, because it acts as deduction in a company's profit and reduces cash assets ...