Current liabilities are defined as: “Debts due to be paid with cash or with goods and services within one year, or within the entity’s operating cycle if the cycle is longer than a year.” (Hongren, Harrison & Oliver, 2012) These liabilities fit into three categories: Current liabilities of known amount; current liabilities that must be estimated; and contingent liabilities. According to the matching principle of accounting, expenses and revenues need to be reported during the same period that they are earned. This can be difficult if the exact amounts are not known. This is the purpose behind estimated and contingent liabilities. In order to provide accurate financial reports companies must record revenues and their associated expenses during the same period so that assets are not overstated and liabilities are not understated. It is imperative that the financial reports are as accurate as possible because decision makers use them to determine the course of action that businesses are to take.(Davis, 2011) With the accuracy of the reports in mind, the Financial Accounting Standards Board (FASB) has formulated the Generally Accepted Accounting Principles (GAAP) which are procedures and guidelines that “ govern how accounts measure, process, and communicate financial information.” (Hongren et al., 2012)
There are many types of current liabilities that have known amounts. Some examples are: payroll expenses, notes payable, and accounts payable. These are some of the most common liabilities that businesses incur. Payroll expenses are the expenses that a company pays to employees including salary, wages and benefits. These expenses are easily calculated and can be predetermined and accounted for ahead of time. Notes payable is the expense that a company pays toward loans. This usually includes interest which must be calculated as well as penalties or discounts for late or early payment. Accounts payable consists of short term credit
References: Horngren, C., Harrison W. &Oliver, M. (2012). Accounting (9th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Davis, J. (2011). Determining the Appropriate Debt Structure. The RMA Journal, 93(9), 40-44, 11. Retrieved March 10, 2012, from ABI/INFORM Global.