At the end of this section, students should be able to meet the following objectives:
- Define a “liability” by listing its essential characteristics.
- Differentiate a current liability from a noncurrent liability.
- Explain the significance that current liabilities have for investors and creditors who are studying the prospects of an organization.
- Compute the current ratio.
- Indicate the appropriate timing for the recognition of a liability.
Question: The June 30, 2009, consolidated balance sheet for The Procter & Gamble Company and its subsidiaries reports totalliabilitiesof over $71 billion, including current liabilities of approximately $31 billion. That seems to be a rather large figure, especially for an organization holding only $3.3 billion in cash and cash equivalents.
For reporting purposes, thecurrent liabilitieswere divided into several specific categories:
- Accounts payable
- Accrued and other liabilities
- Debt due within one year
When creating a balance sheet, what is reported as a liability? Why are some liabilities shown as current whereas others are not?
How does an accountant draw a distinction between liabilities that are labeled as current and those that are reported as noncurrent (sometimes referred to as long-term liabilities)?
Answer: A liability is an obligation owed to a party outside the reporting organization—a debt that can be stated in monetary terms. Liabilities normally require the payment of cash but may at times be settled by the conveyance of other assets or the delivery of services. Some reported liabilities are for definite amounts, although a number are no more than estimations.
The distinction between current and noncurrent liabilities is a function of time. A debt that is expected to be satisfied within one year from the date of the balance sheet is classified as a current liability1. Amounts owed for rent, insurance, utilities, inventory purchases, and the like usually fall into this category. If payment will not be made until after that one-year interval, the liability is reported as noncurrent. Bonds and notes payable are common examples of noncurrent debts as are liabilities for employee pensions, long-term leases, and deferred income taxes. Current liabilities appear before noncurrent liabilities on a balance sheet.
Question: Below is the liability section of the balance sheet reported by Johnson & Johnson and Subsidiaries as of December 28, 2008. Note that additional information about many of these liabilities is provided in the notes to the company’s financial statements.