The one-year test; the three families; the accrual side seen from the liability
◈ 9 cardsDefine a liability, classify it as current or long-term by the one-year / operating-cycle test, sort the paper’s liabilities into known, estimated and contingent, and record the known ones (payables, accrued liabilities, unearned revenue).
What a liability is
A liability is a present obligation, arising from a past transaction or event, that will be settled by giving up economic resources — cash, usually, but also goods or services. All three parts matter on the paper. Northlake Nordic Centre Inc.’s December propane bill is a liability the day the propane is delivered, not the day the invoice is paid (past event; present obligation). Its unearned membership revenue is a liability although no cash will ever leave — it is settled by providing the skiing. And the slip-and-fall claim a customer has threatened is a possible obligation whose existence depends on a future event, which is what makes it a contingency rather than a liability outright.
Current or long-term
A liability is current if it is due within one year of the balance-sheet date or within the operating cycle, whichever is longer; everything else is long-term. The test is when it is settled, not what it was for: a six-month note that bought a snowmobile fleet is current, and the instalment of the five-year groomer loan that falls due next June is current too (L6.3). Current liabilities are listed roughly in the order they fall due, and ASPE s.1510 wants government remittances (HST, CPP, EI, source deductions) shown separately from ordinary payables.
Three families
Northlake’s liabilities at 31 December, as the paper would list them in a narrative, sort into three families by how much is known:
| Family | What is known | Northlake’s examples |
|---|---|---|
| Known (determinable) | who, how much, when | accounts payable · salaries payable · interest payable · HST payable · unearned revenue · current portion of the loan · the note |
| Estimated | the obligation exists; the amount must be estimated | warranty on rental gear · income tax for the year |
| Contingent | whether an obligation exists depends on a future event | the slip-and-fall claim |
Known liabilities are recorded at their amount. Estimated liabilities are recorded at the best estimate — “we do not know the exact amount” is never a reason to record nothing. Contingencies follow the s.3290 rule of L12.4: accrue, disclose, or nothing, depending on likelihood and estimability.
The known ones, seen from the liability
Module 5 taught the accrual entries from the expense side. The same entries are the liability side of this lesson. The propane bill — 2,300 received in December, payable in January — is Dr Utilities Expense 2,300 / Cr Accounts Payable 2,300 in December: the expense is December’s and so is the obligation. The membership: on 1 December Northlake receives 18,000 for a three-month winter membership. Nothing has been earned; the whole 18,000 is a liability — Dr Cash 18,000 / Cr Unearned Revenue 18,000. At 31 December one month of three has been provided: Dr Unearned Revenue 6,000 / Cr Service Revenue 6,000, leaving 12,000 of unearned revenue, a current liability settled by January’s and February’s skiing.
The passes work the same way. Season passes of 54,000 sold for a four-month season with one month gone: 13,500 earned, 40,500 unearned. Memberships and passes together: revenue earned in December 6,000 + 13,500 = 19,500; unearned at 31 December 12,000 + 40,500 = 52,500, all of it current because the season ends by April. That 52,500 is the largest current liability on Northlake’s balance sheet, and it never involves the bank.