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].