Examples of Current Liabilities

  • Identify common types and categories of current liabilities

 

Once again, the annual report from The Home Depot, Inc. provides us with a fairly comprehensive list of typical current liabilities:

THE HOME DEPOT INC.
CONSOLIDATED BALANCE SHEET
in millions, except per share data February 2, 2020 February 3, 2019
Subcategory, Current liabilities:
     Short term debt $     974 $     1,339
     Accounts payable 7,787 7,755
     Accured salaries and related expenses 1,494 1,506
     Sales taxes payable 605 656
     Deferred revenue 2,116 1,782
     Income taxes payable 55 11
     Current installments of long-term debt 1,839 1,056
     Current operating lease liabilities 828
     Other accrued expenses 2,677 2,611
       Total current liabilities Single line
18,375
Single line
16,716
Single line Single line

 

Short-Term Debt

Short-term debt usually represents lines of credit with a bank that are used to ensure that (a) funds are available when needed (e.g. to make payroll and to take advantage of purchase discounts), and (b) there is not too much cash sitting idle in a non-interestbearing checking account. Similarly, a checking account that would normally be classified as a current asset except that is showing a credit balance (overdrawn) would be shown as a short-term debt to the bank.

Here is a quick video on recording short-term debt:You can view the transcript for “FA 8 2 Notes Payable” here (opens in new window).

 

Accounts Payable

Accounts payable is the mirror image of accounts receivable and is often referred to as trade accounts or trade accounts payable and represents debt that arises during the normal course of business. We saw this as we studied inventory, which is often bought “on account” with no paperwork other than a purchase order. Terms are usually 30 days with no interest. For Home Depot, a typical transaction might be to order 30 circular saws from Black and Decker. When the saws are delivered, Home Depot records an increase (credit) in accounts payable, and an increase (debit) in inventory. Notice that for The Home Depot, accounts payable is the most significant current liability on the balance sheet.

Accrued salaries and related expenses is often an individually significant item and represents the salaries and wages earned by workers but not yet paid. Since The Home Depot uses a fiscal year that ends “on the Sunday nearest to January 31st.”[1] the most current audited results of operations and statement of financial position (balance sheet) are for the year ended February 2, 2020. On that date, according to the balance sheet, the Accrued salaries and related expenses are approximately $1.5 billion in wages and payroll taxes outstanding. That may seem like a lot, but for a company with almost 400,000 employees, it averages only $375 per person, and probably represents wages earned during that last week of January that will be paid in early February.

Sales Tax Payable

A collection of tax sheets.

Many states have a state sales tax on items purchased by consumers. The company selling the product is responsible for collecting the sales tax from customers. When the company collects the taxes, the debit is to Cash and the credit is to Sales Tax Payable. Periodically, the company pays the sales taxes collected to the state. At that time, the debit is to Sales Tax Payable and the credit is to Cash.

Deferred Revenue

Deferred Revenue is also called unearned revenue. This is cash received in advance of the sale of a product or of providing a service. Remember the foundation of accrual basis accounting is to recognize revenue as it is earned. In a normal sales transaction, you would debit the checking account to recognize the increase in funds from the customer, and you would credit Sales Revenue (earned income). Also, you would of course debit cost of goods sold and credit inventory. However, if you receive the funds in advance, you would debit the checking account and credit a liability–unearned revenue or in the case of Home Depot, deferred revenue (to defer literally means, “to postpone”). For The Home Depot, the most likely source of the liability called deferred revenue is the sale of gift cards (see page 42 of the 2019 annual report).

Income Taxes Payable

As a corporation, The Home Depot incurs income tax on earnings and therefore incurs a liability (debt to the IRS) for the unpaid portion at the end of the year (or if the company expects a refund from overpayment, a current asset.)

Current Portions of Long-Term Debt

Accountants move any portion of long-term debt that becomes due within the next year to the current liability section of the balance sheet. For instance, assume a company signed a series of 10 individual notes payable for $10,000 each; beginning in the 6th year, one comes due each year through the 15th year. Beginning in the 5th year, an accountant would move a $10,000 note from the long-term liability category to the current liability category on the balance sheet. The current portion would then be paid within one year.

Leases

There are two kinds of leases: operating, and financing. Leases that are basically financing the acquisition of an asset are usually classified as long-term debt. Operating leases, as we saw in the section on noncurrent assets, can create both an asset (right-of-use) and a liability (debt to the leasing company).

Other Accrued Expenses

To accrue something means to add it, so other accrued expenses could be things like interest expense on debt that hasn’t yet been paid, product warranties, and even probable settlements of lawsuits. They would be anything else that fit the FASB’s definition of a liability:

probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events.

Anything not clearly a current liability is a noncurrent liability and will be covered in the next section, but in general that category includes: long-term notes payable, minus the current portion; long-term lease obligations; bonds payable; and deferred taxes.

A deferred tax liability arises when the current taxes calculated on net income are different than the actual tax being paid to the IRS because of timing differences. The most common timing difference arises when a company uses straight-line depreciation for financial accounting purposes but accelerated cost recovery (a form of double-declining-balance) for taxes, since the Internal Revenue Code requires companies to use ACRS (Accelerated Cost Recovery System).

Also, if the company had an obligation to pay employees a pension or other post-retirement benefits such as health care, those items would be mostly long-term liabilities.

THE HOME DEPOT INC.
CONSOLIDATED BALANCE SHEET
in millions, except per share data February 2, 2020 February 3, 2019
       Total current liabilities Single line
18,375
Single line
16,716
Long-term debt, excluding current installments Single line28,670 Single line26,807
Long-term operating lease liabilities 5,066
Deferred income taxes 706 491
Other long-term liabilities 1,535 1,867
          Total liabilities Single line
54,352
Single line
45,881
Single line Single line

 

Here is a quick review of current liabilities: