This is calculated by taking eachthree-month interest accumulation of $8,100 and multiplying by thefour recorded interest entries for the periods. You could alsocompute this by taking the original principal balance andmultiplying by 9%. On March 31, the end of thefirst three months, Sierra records their first interestaccumulation. Accountants should watch for revenuerecognition related issues in preparing the financial statements oftheir company or client, especially when employees’ or management’sstock options are about to vest.

Current Portion of a Note Payable

Companies must stay vigilant in monitoring these potential obligations, as changes in circumstances can swiftly alter their status from contingent to actual liabilities. Explore the nuances of liabilities in financial reporting, from recognition to industry-specific impacts on financial ratios. Because many executives, other top management, and even employees have stock options, this can also provide incentive to manipulate earnings. This is the date the option vests, at what is commonly called the strike price. Options are worthless if the stock price on the vesting date is lower than the price at which they were granted.

However, since Sierra only owed a remaining balance of $11,000 and not the original $12,000, the discount received was 2% of $11,000, or $220, as demonstrated in this journal entry. Since Sierra owed $11,000 and received a discount of $220, the supplier was paid $10,780. This second journal entry is the same as the one that would have recognized an original purchase of $11,000 that qualified for a discount. Cash increases (debit) for the sales amount plus sales tax.Sales Tax Payable increases (credit) for the 6% tax rate ($18,000 ×6%).

Terms of the loan require equal annualprincipal repayments of $10,000 for the next ten years. Even though theoverall $100,000 note payable is considered long term, the $10,000required repayment during the company’s operating cycle isconsidered current (short term). This means $10,000 would beclassified as the current portion of a noncurrent note payable, andthe remaining $90,000 would remain a noncurrent note payable. Researchers have found that when executive options are about tovest, companies are more likely to present financial statementsmeeting or just slightly beating the earnings forecasts ofanalysts. Thiscan lead to practices that sometimes include fraudulentoverstatement of quarterly revenue.”3If earnings meet or exceed expectations, a stock price can hit orsurpass the vested stock price in the option.

• An invoice from the supplier (such as the one shown in Figure 12.2) detailing the purchase, credit terms, invoice date, and shipping arrangements will suffice for this contractual relationship.
• Non-current liabilities extend beyond one year and often encompass long-term debt, such as bonds payable or long-term lease obligations.
• The company may notrecognize revenue until a product (or a portion of a product) hasbeen provided.
• Our Ebook covers all the ins and outs of small business loans to help you get funded as soon as possible.
• Lawsuits regarding accounts payable are required to be shown on audited financial statements, but this is not necessarily common accounting practice.

Inventory, the asset account, would increase (a debit)for the purchase price of the merchandise. Failure to deliver on time not only creates accounting mismatches but also reputational risk. Understanding these ratios helps stakeholders, including investors and creditors, make informed decisions about the company’s financial health. By analyzing changes in these ratios over time, one can discern trends in a company’s financial strategy and risk management.

2 Analyze, Journalize, and Report Current Liabilities

To demonstrate this concept, after buying $12,000 in inventory, returning $1,000 in inventory, and then paying for the remaining balance and qualifying for the discount, Sierra’s Inventory balance increased by $10,780, as shown. Because many executives, other top management, and evenemployees have stock options, this can also provide incentive tomanipulate earnings. This is the date the option vests, at whatis commonly called the strike price.Options are worthless if the stock price on the vesting date islower than the price at which they were granted. This could resultin a loss of income, potentially incentivizing earningsmanipulation to meet the stock market’s expectations and exceed thevested stock price in the option.

Thinking about Unearned Revenue

Salesincreases (credit) for the original amount of the sale, notincluding sales tax. If Sierra’s customer pays on credit, AccountsReceivable would increase (debit) for $19,080 rather than Cash. The football league made payment outside of the discount period,since April 15 is more than ten days from the invoice date.

Rate

• Sierra now sells the soccer equipment to a local soccer league for $18,000 cash on August 20.
• Sierra Sports takes out a bank loan on January 1, 2017 to coverexpansion costs for a new store.
• Failure to deliver on time not only creates accounting mismatches but also reputational risk.

Sierra and the league have worked out credit terms and a discount agreement. As such, the league can delay cash payment for ten days and receive a discount, or for thirty days with no discount assessed. Instead of cash increasing for Sierra, Accounts Receivable increases (debit) for the amount the football league owes.

Account

You have worked out a contract with a localsupplier to provide your business with packing materials on anongoing basis. Record the journal entries to recognize theinitial purchase on April 3, and payment of the amount due on April11. A second possibility is that Sierra will return part of thepurchase before the ten-day discount window has expired. The following twojournal entries represent the return of inventory and thesubsequent payment for the remaining account payable owed. Theinitial journal entry from August 1 will still apply, because weassume that Sierra intended to keep the full $12,000 of inventorywhen the purchase was made.

At first, start-ups typically do not create enoughcash flow to sustain operations. Both Interest Payable and Cash decrease for the total interest amount accumulated during 2017. This is calculated by taking each three-month interest accumulation of $8,100 and multiplying by the four recorded interest entries for the periods. You could also compute this by taking the original principal balance and multiplying by 9%. On March 31, the end of the first three months, Sierra records their first interest accumulation.

On the balance sheet, the current portion reporting and analyzing current liabilities of thenoncurrent liability is separated from the remaining noncurrentliability. No journal entry is required for this distinction, butsome companies choose to show the transfer from a noncurrentliability to a current liability. In financial reporting, distinguishing between current and non-current liabilities is fundamental for understanding a company’s financial obligations.

The question is whether the business has enough current assets to cover the financial obligations it has as they come due. The most financially secure companies have enough cash on hand to cover current liabilities, but that isn’t strictly necessary. A warranty expense is debited for the provision amount that will offset product sales revenue in the income statement and a credit is posted to warranty provision liability. The amount for repairs occurring in year one is reported in the current liability section of the balance sheet; the portion relating to major repairs in three years is disclosed as long-term liability. As the warranty claims are made, the liability account is debited and cash is credited for the cost of the repair. The long-term liability warranty provision is moved to the current liability section in the accounting period occurring three years after the product sale.

Record your journal entries for the initial payment from the Coopers, and when the catering service has been provided on June 10. Let’s consider our previous example where Sierra Sportspurchased $12,000 of soccer equipment in August. Sierra now sellsthe soccer equipment to a local soccer league for $18,000 cash onAugust 20. As such, the league can delay cash payment forten days and receive a discount, or for thirty days with nodiscount assessed. Instead of cash increasing for Sierra, AccountsReceivable increases (debit) for the amount the football leagueowes. Let’s say that Sierra only provides half the uniforms on May 6and supplies the rest of the order on June 2.

In many cases, this item will be listed under “Other Current Liabilities” if it isn’t lumped in with them. Adding the short-term and long-term liabilities together helps you find everything that is owed. Our Ebook covers all the ins and outs of small business loans to help you get funded as soon as possible. Benilyn Formoso-Suralta is a staff writer at Fit Small Business focusing on finance, accounting, and Small Business Loans. She brings with her 12 years of experience as a banking officer with the Bank of the Philippine Islands with expertise in consumer banking, real estate sales, and foreign exchanges.

Inventory, the asset account, would increase (a debit) for the purchase price of the merchandise. Thefollowing entry occurs to show payment of this principal amount duein the current period. To demonstrate this concept, after buying $12,000 in inventory,returning $1,000 in inventory, and then paying for the remainingbalance and qualifying for the discount, Sierra’s Inventory balanceincreased by $10,780, as shown. Cost of Goods Sold ÷ Average Accounts PayableHelps understand how quickly a company pays suppliers.