UNDERSTANDING ACCOUNTING TALK 12: Current Liabilities
The Current Liabilities accounts generally and commonly used are: Accounts Payable, Notes Payable, Accrued Interest Payable, current portion of Loans Payable, payables to the government (e.g., taxes, social security premiums, etc).
The portion of Loans Payable not due within the year is normally separated from the current portion and is an account under Noncurrent Liabilities. Occasionally, especially in large corporations, the Noncurrent Liabilities include Bonds Payable.
Accounts Payable are directly connected to the operations or activities of a corporation, a small business or proprietorship; e.g. supplies bought on credit for use in operations or services engaged to pursue a related activity.
Notes Payable is a promissory note of the corporation, small business or proprietorship. Sometimes, an Accounts Payable becomes a Notes Payable. This is when a supplier comes to collect on due date and no funds are currently available for the payment. In this case, the supplier becomes a creditor and asks to be secured by a promissory note.
Accrued Interest Payable is the interest incurred but not yet paid.
I have a loan showing as a liability on my balance sheet. Do I bill it to pay it ,so it shows as an expense to the company?
If it’s a liability on your balance sheet, then you have been billed for it. It is an expense depending on the character of the liability. It was for a purchase which has not been paid & which you use for your business, then it should be an expense. If it was for a loan, the interest portion would be an expense. However, interests payable are usually a separate account in your liabilities.
ECAD-
Thanks for the great question! It inspired a post, which will be up on Monday, but here it is:
Because liabilities (loans) have a positive credit balance, in order to reduce it you’ll need to debit that account. The offsetting credit will be to [reduce] cash. However, most loans come with interest. While repayment of loan principal itself is not an expense, interest is. To book the entry you should debit an interest expense account, offsetting with a credit to cash.
All together it looks like this:
Debit to Loan Liability $principal
Debit to Interest Expense $interest
Credit to Cash
If you have been booking interest payable (credit balance), then you’ll debit that instead of expense.
Why Isn’t a Loan Repayment of Loan Principal an Expense?
The loan itself is not an expense, but some of the things you finance with those funds are. When money comes into the company in the form of a Loan/Liability, Cash is increased (debited), and a loan is created (credited). When that cash is spent, Cash is reduced (credited) and an expense is increased (debited). Unless of course the Cash is spend on an Asset, in which case you debit the Asset and expense it over time through Depreciation.
I hope that answers your question. Keep ‘em coming!
Ren,
It’s nice to see you’re still around here. I’d love any feedback you have to give me!
Thanks,
Lela
Thanks for all your help.