Liabilities

• Author: Vern Krishna
• Pages: 180-206

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Chapter 8: Liabilities

A. OVERVIEW

Liabilities are the legal obligations of a business to persons other than

the owners of the business. However, the owners of a business can

also be its creditors where, for example, they lend it money.

Liabilities may be actual cash obligations payable sometime in the

future, such as for example, accounts payable, notes payable, bonds,

and mortgages. Such liabilities are usually settled in cash.

Liabilities may also arise in other ways. For example, prepaid rev-

enues (also known as “deferred income” or “deferred revenues”) are

liabilities, which an entity usually discharges through the delivery of

goods or services for which the business received the prepayment. In

a legal practice, for example, client retainers are the classic form of

deferred revenues. Until the lawyer renders the service for which they

receive payment in advance, the funds remain in the trust account

and belong to the client. e lawyer must “earn” the income before

they can recognize it as revenue.

Liabilities may be due on dierent dates, accrue interest at various

rates, and be secured by dierent means. We classify liabilities on the

balance sheet according to their duration and timing for payment.

e following is the Liabilities section of the Balance Sheet of the

hypothetical company, Duggan Inc.

Chapter 8: Liabilities 

Partial Balance Sheet for Duggan Inc as at September 

Liabilities (thousands of dollars) 

$



$

Current Liabilities:

Current portion of longterm debt  

Notes payable  

Accounts payable  

Accrued Liabilities:

Income taxes  

Salaries & wages  

Advertising & promotion  

Deferred revenue  

Total current liabilities  

Longterm Liabilities:

Longterm debt  

Nonpension postretirement benef‌its  

Deferred income taxes  

Capital leases  

Total longterm liabilities  

Total Liabilities  

B. CURRENT LIABILITIES

Current liabilities are known obligations (such as accounts payable

and notes payable) or estimated amounts (such as product war-

ranties), which the enterprise will satisfy in the near future, usually

within one year. Current liabilities are a source of funding at no cost

to the borrower. For example, where a business buys merchandise on

credit and is required to pay within thirty days, it is, in eect, getting

a thirty-day interest-free loan. Similarly, unearned subscription rev-

enue prepaid to a publisher is, in eect, an interest-free loan from the

subscribers to the publisher. Duggan Inc has total current liabilities of

$,, at year end in -.