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.
Nature of Contingent Liabilities
Statement of Contingent Liabilities
As stated on page 345, contingent liabilities range from those almost certain to materialize to those extremely remote. For some purposes a full statement of all such liabilities is needed to give an adequate view of conditions within the business. For other purposes, so detailed a statement may not be necessary although usually desirable. The Federal Reserve Board requires on a balance sheet submitted as the basis for credit a full statement of contingent liability as follows: