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12.1 Identify and Describe Current Liabilities

What are Current Liabilities?​

Current liabilities are obligations that:

  • Must be paid within one year (or operating cycle if longer)
  • Are settled using current assets or by creating new current liabilities
  • Include accounts payable, accrued expenses, short-term debt, etc.

Types of Current Liabilities​

Common Current Liabilities:

  1. Accounts Payable: Amounts owed to suppliers
  2. VAT Payable: VAT owed to tax authorities
  3. Salaries Payable: Wages owed to employees
  4. Social Charges Payable: Social security contributions
  5. Interest Payable: Interest on loans
  6. Short-Term Notes Payable: Notes due within one year
  7. Unearned Revenue: Payments received in advance
  8. Accrued Expenses: Expenses incurred but not yet paid
  9. Current Portion of Long-Term Debt: Portion of long-term debt due within one year
  10. Tax Payable: Income tax and other taxes

Accounts Payable​

Accounts Payable are amounts owed to suppliers for goods or services purchased on credit.

Characteristics:

  • Arise from credit purchases
  • Usually due within 30-60 days
  • No interest typically charged
  • Important for cash flow management
  • Must be paid on time to maintain relationships

Example:

  • Purchase inventory on credit: €5,000

Journal Entry:

321000 Inventory                   €5,000
400000 Accounts Payable                        €5,000
To record purchase on credit

Payment:

400000 Accounts Payable            €5,000
510000 Cash                                    €5,000
To record payment to supplier

PCN Account:

  • 400000: Accounts Payable - Suppliers (Fournisseurs)

Managing Accounts Payable:

  • Track payment due dates
  • Take advantage of early payment discounts
  • Maintain good supplier relationships
  • Monitor aging of payables
  • Ensure sufficient cash for payments

Accrued Expenses​

Accrued Expenses are expenses that have been incurred but not yet paid.

Common Types:

  • Accrued salaries
  • Accrued interest
  • Accrued utilities
  • Accrued rent
  • Accrued taxes

Example: Accrued Salaries

  • Employees worked last week of month
  • Salaries earned but not yet paid: €3,000

Journal Entry:

620000 Salaries Expense           €3,000
440000 Salaries Payable                        €3,000
To accrue salaries earned but not yet paid

When Paid:

440000 Salaries Payable            €3,000
510000 Cash                                    €3,000
To record payment of accrued salaries

Unearned Revenue​

Unearned Revenue (also called deferred revenue) is payment received in advance for goods or services not yet provided.

Example:

  • Customer pays €1,000 in advance for catering services
  • Services will be provided next month

Journal Entry (Cash Received):

510000 Cash                        €1,000
470000 Unearned Revenue                        €1,000
To record advance payment

When Services Provided:

470000 Unearned Revenue           €1,000
700000 Service Revenue                        €1,000
To recognize revenue when services provided

PCN Account:

  • 470000: Unearned Revenue (Produits Différés)

VAT Payable​

VAT Payable is VAT collected on sales that must be paid to tax authorities.

How VAT Payable Arises:

  • Business collects VAT on sales
  • VAT is added to selling price
  • Business holds VAT until payment to authorities
  • VAT is a liability until paid

Example:

  • Sale: €1,000 (excluding VAT), VAT 17%

Journal Entry:

510000 Cash (or 410000 Receivable) €1,170
700000 Sales Revenue                          €1,000
430000 VAT Payable                              €170
To record sale with VAT

Important: VAT Payable is recorded at the time of sale, not when cash is received. This ensures proper period matching.

Payment (VAT Return):

430000 VAT Payable                €170
510000 Cash                                    €170
To record VAT payment

PCN Account:

  • 430000: VAT Payable (TVA à Payer)

VAT Payable Management:

  • Track VAT collected on all sales
  • Must file VAT return (monthly/quarterly/annual)
  • Must pay by deadline
  • Penalties for late payment
  • Must maintain proper records

Salaries Payable​

Salaries Payable are wages earned by employees but not yet paid.

Example:

  • Salaries earned but not paid: €5,000

Journal Entry:

620000 Salaries Expense           €5,000
440000 Salaries Payable                        €5,000
To accrue salaries payable

Payment:

440000 Salaries Payable            €5,000
510000 Cash                                    €5,000
To record salary payment

PCN Account:

  • 440000: Salaries Payable (Salaires à Payer)

Luxembourg Compliance Note​

Current liabilities in Luxembourg:

  • Must be properly classified (PCN Class 4)
  • Must be accurately recorded
  • Must be paid on time
  • VAT and social charges are mandatory
  • Penalties for late payment
  • Must maintain proper documentation

Think It Through​

Why is it important to accurately record current liabilities? What happens if they are understated or overstated?