AWhat is a current liability?

According to our textbook current liabilities are “obligations that must be settled within 1 year or the operating cycle, whichever is longer”(principles of accounting, 2012). Current liabilities are the opposite of current assets. Current liabilities include accounts payable, short term notes payable, income tax payable, accrued expenses, and portion of long term debt payable.

From the perspective of a user of financial statements, why do you believe current liabilities are separated from long-term liabilities?

Long-term liabilities are different from short-term liabilities in that they are not due within the next 12 months. These types of liabilities include loans, tax payments that have been deferred, and pension payments. It is important to separate current liabilities from long-term liabilities to get a more accurate view of the company’s current assets.

Based on your current experience as well as any additional research you may have done provide two examples of situations where businesses collect money from customers and employees and report these accounts as a current liabilities.

One example of this would be when a company sells gift cards. When a customer purchases this item the company is expected to offer items in return for the gift card.

Another example would be a business that sells magazines. They get paid upfront for a subscription and promise to deliver the magazines for X amount of months for the prepaid amount. The prepayment would be recorded as unearned revenue. As the goods and services are provided this is adjusted on the balance