Current And Long Term Liabilities

1504 WordsDec 8, 20157 Pages
The main focus of a business is to make profits, but understanding how to manage both current and long-term liabilities will insure an organizations success. A liability is a debt incurred by a business that must be repaid. There are current liabilities, which need to be repaid within one year and there are long-term liabilities that are repaid over a period of time longer than a year. A business needs money to operate, and by incurring liabilities it gives a business the extra money or assets that are needed to extend the operational period. During an operational period, a business must be able to pay its current liabilities and make payments on long-term liabilities with its revenues. I will discuss both current and long-term…show more content…
If a business borrowed $10,000 at 5% on a 6 month short-term loan, the accountant would debit cash for $10,000 and credit notes payable for $10,000. To pay back the amount of the loan and interest at maturity, an accountant would debit notes payable for $10,000, debit interest expense for $250, and credit cash for $10,250. Businesses will sometimes receive money before they provide goods or services, which would create an account called unearned revenue. If a business were to receive $500 for a promised service that has not been provided yet, the accountant would debit cash for $500 and credit unearned service revenue for $500. As soon as the service is provided, the accountant can debit unearned service revenue for $500 and credit service revenue for $500. When businesses sell goods to consumers they have to collect sales tax for everything that is sold. A business incurs a liability when goods are sold until they pay the taxes to the state. If a business receives cash sales of $20,000 and collects an additional 5% for sales tax, an accountant would debit cash for $21,000, credit sales revenue for $20,000, and credit sales tax payable for $1,000. The accountant would debit sales tax payable for $1,000 and credit cash for $1,000 to pay the sales tax to the state. Businesses will incur expenses and pay them at a later date, which is referred to as accrued expenses. A business
Open Document