Current Liabilities
Notes and accounts payable, using the terms broadly, constitute practically all of the current liabilities. Not all notes nor all accounts payable are, however, current items. The term “current” cannot be standardized; it varies and will perhaps always vary according to customs and practices in any particular trade. In the main, the 90-day period may be taken as the average. That is, on the given date of the balance sheet a knowledge of the debts that must be met within the next 90 days is a minimum of necessary information for the purpose of judging business condition, particularly so far as concerns the credit extended to it. When a balance sheet is submitted to the bank as the basis for credit, other data concerning notes payable are usually called for—such as notes given for merchandise, notes negotiated to own banks, notes otherwise disposed of. The Federal Reserve Bulletin for April, 1917, under the title “Uniform Accounting a Tentative Proposal” suggests for balance sheet presentation a list of notes analyzed as to acceptances made for merchandise or raw material purchased; notes given for merchandise or raw material purchased; notes given to banks for money borrowed; notes sold through brokers; notes given for machinery, additions to plant, etc.; notes due to stockholders, officers, or employees. R. H. Montgomery[49] suggests a division of notes into the groups: notes issued for merchandise; notes discounted by own banks; notes sold through brokers; and demand loans. He suggests further that an additional separation into notes accompanied by collateral and notes with which no collateral is given would be desirable.
From the above it is seen that the present tendency of bankers is to insist on a full statement of essential facts needed to pass intelligent judgment as to the exact status of affairs. Even in the case of balance sheets, the accuracy of which has been certified by someone, some bankers require a certificate as to the character of the certifier unless he is well known. More and more is the fact being recognized that legitimate business has nothing to fear and much to gain by making a full and free statement of exact condition, and that the sooner business supported by fraudulent statement is eliminated, the better will it be for legitimate enterprises. In certain cases, however, the interests or purpose of a business would not be well served by the detailed information demanded by the banker and, here as elsewhere, no specific rule can be laid down other than that the purpose should in all cases govern the form and particularly the amount of detail.
Loans from Bank
In connection with advances from the bank it should be noted that the banker does not expect to become a permanent partner in the business, but that one of his legitimate functions is to furnish funds for seasonal fluctuations. Oftentimes a concern does not start with enough capital to carry its load of maximum trade, from the fear that advantageous investment of surplus funds during the dull season will not be possible. It may rightly expect its bank to furnish funds for this purpose when expenses are heaviest, and to await repayment of the loan out of the income, as accounts are collected after the peak of the seasonal trade is passed. This is one of the fields of legitimate banking and the banker has a right to whatever information is necessary to assure himself that his aid is being put to proper use.
General Classification of Notes
For general purposes, a separation of notes into notes for trade purposes and notes for other purposes is desirable. Trade purposes would be limited to merchandise purchases and loans for working capital. Other purposes would be long-time loans, purchase money notes often secured by mortgage on equipment, and notes of officers and employees. These last would best be classified by their showing as fixed rather than current liabilities.
Accounts Payable
The use of the term, accounts payable, to cover only creditors for stock-in-trade and other trade purposes is too indefinite and inaccurate, the term being too comprehensive and inclusive. The considerations applying to trade debtors have equal weight in requiring the use of the term trade creditors for the purposes mentioned above. Accounts payable to trade creditors are usually the current items, whereas those payable to stockholders, officers, etc., and those due to a parent or holding company are more or less fixed, as there is usually no particular urgency as to the time of their payment. An analysis of trade creditors into “not due” and “past due” will at least bring out the information as to neglected discounts and some idea as to the amount of cash needed to pay off debts and to secure their discount.
There is no necessary relationship between accounts and notes payable, nor any significance in their relative amounts. In some trades notes are given in order to obtain the discounts; in others notes are given at the date of purchase of the commodities.
Deposits. Another group of accounts payable of a more or less current type consists of deposits of various sorts. The business may accept deposits from customers or employees for various purposes. Consumers’ deposits with gas and electric light companies as guarantee to cover payment of bills and possible damage to meters or other company property; deposits covering locker privileges, breakage of materials, keys issued, and the like, are examples of this kind. These deposits are seldom all claimed at any one time; experience only can indicate the necessary financial provisions to be made currently for them. In some instances there is an accruing liability on account of interest on these deposits which must also be cared for.
Guarantees. Sometimes goods are purchased and only partly paid for, a portion of the purchase price being retained as a guarantee of quality until opportunity is given for adequate examination and acceptance or rejection. Similarly, in the case of construction work done by contract or subcontract, the owner—or, if a subcontract, the general contractor—retains a certain percentage of the contract price as a guarantee of performance of the whole according to contract agreement. This liability for the portion retained is a current liability, as a usual thing, and is to be listed under accounts payable with suitable subtitle.
Long-Term Notes. Long-term notes and accounts, bonds, and other fixed liabilities become current as their maturity closely approaches and provision for payment must be made.
Future Deliveries. On the border lines between contingent and full liabilities may be classed the liability because of goods purchased with long future dating. This is sometimes allowed by a seller to secure warehouse room for new product. It is undoubtedly best to set up both the asset and the liability, even where the goods have not yet been received.
Consigned Goods Sold. The factor’s real liability on account of consigned goods sold should, of course, be shown as a current liability, offset by any claims for expenses incurred on account of the consignor and any accrued commissions earned on sales to date.
Dividends Not Yet Paid. Another item belonging to accounts payable is dividends declared but not yet paid. Though it may be the custom of a company always to declare a dividend on a given date, no liability is incurred on account of dividends until they are actually declared. Upon declaration of a dividend the company makes itself liable to stockholders for the amount of the dividend. This liability ranks as an unsecured debt on the same footing as unsecured liabilities to other creditors. The dividend liability in large part is usually soon liquidated. Any unclaimed dividends constitute a liability until claimed or authority is given for other disposition. The item is usually small and is best shown as a current liability even though the chance of its being claimed may be remote. The method of handling and safeguarding the dividend transaction is treated in [Chapter XXIV].
Accrued Expenses
The final item to be considered among the current liabilities is the group of accrued expenses. These constitute such items as wages, salaries, rents, royalties, expense supplies purchased but unpaid for, interest, advertising, sales commissions, traveling expenses, freights, water and other taxes, etc.—in fact, all services which have been rendered the business previous to the date of the balance sheet but which on that date are unpaid. These usually comprise the most urgent of the liability items and so are properly classed as current. There is seldom any business in which items of this kind are not encountered and, as stated on page 343, a careful examination of the records and familiarity with the business is needed to secure a full statement of them.
With regard to some of these items, difference of opinion exists. It is argued that until the amount of the liability is known, no real liability can be said to exist. Thus, taxes for the current year may not be known until the following year. Proverbially taxes are as certain as death, and there would seem to be no unreality or contingency about their incidence. As the current year passes by, the accounts should include a charge for taxes. Since the real amount is not known, it must be carefully estimated; for any difference must be taken up when the real amount becomes known, and so may disturb and somewhat invalidate the results for comparative purposes. Because of the fact that the current amount is an estimate, the title given the liability thereunder is sometimes called “Reserve for Taxes” rather than “Accrued Taxes.” No matter what the caption may be, it should usually be listed as a current liability.
Booking of Accrued Expenses
As in the case of deferred expenses, so in the booking of accrued expenses, in some quarters it is thought highly unscientific to record both the expense and liability elements in the same account at the time of adjusting the books. Use is made of a separate liability account entitled “Interest Accrued,” for example. When so used immediately at the opening of the new period, this account is either transferred to the expense account where it will act as an offsetting credit to the expense when paid, so automatically reducing the amount to the part properly applicable to the new period; or the account may be allowed to stand untouched (and therefore having no real significance) till the end of the next period when only the difference between it and the new amount accrued is made the basis of the new adjusting entry. Both these methods, while securing a more evident separation of the expense and liability elements, do so only at the cost of a needless multiplication of accounts and work. To one acquainted with the significance of bookkeeping methods, the old way of treating the liability element as an inventory in the expense account makes a definite allocation of the two elements, and does so with less burden on the bookkeeper and is to be preferred in most cases.
Deferred Credits
Deferred credits, as already explained, are analogous to current liabilities in that they represent unearned income. The enjoyment or earning of this income requires the rendering of certain services which are a claim on the current assets. In this sense, then, they belong to the current liability group, for the payment of which the current assets must be available.