Current liabilities of the enterprise are called the real debt of the organization existing at the reporting date. Their repayment entails an outflow of monetary resources and a decrease in benefits. Let us further consider the composition and features of current liabilities .
General information
Current liabilities - debt arising from transactions or economic transactions in the past. They can be short or long term.
Short-term current liabilities are repaid during the operating cycle or 1 year. All other debt is non-current.
Accounting Features
Transactions in obtaining and repaying short-term loans are recorded at the expense of. 3010-3020. Analytics are conducted for each type of loan, to individual lenders.
Overdraft, which is a type of short-term loan, provided in excess of the balance of funds in the account, as well as loans outstanding on time, are recorded separately.
Solvency ratio on current liabilities
It is determined during the audit. The objectives of the audit is to form a specialist opinion on:
- The state of accounting and internal control of the legality of debt.
- The correctness of accounting for settlement transactions, including those related to the payment of taxes.
- Timeliness of repayment of current liabilities .
During the audit are carried out:
- Checking the correctness of registration of primary documentation. It serves as the basis for accounting for current liabilities .
- Verification of analytical, synthetic accounting, their relationship.
- The correctness of transferring information to the general ledger and reporting, the use of relevant accounts.
- Assessment of the organization of internal control of settlement operations on debt repayment.
- Verification of the classification of obligations, the availability of appropriate clarifications in the notes to the statements.
- Assessment of the effectiveness of the use of credit funds.
Audit Objects
When checking current liabilities, debts on:
- settlements with suppliers, customers, contractors, buyers;
- extrabudgetary deductions;
- settlements with municipal and state bodies;
- social insurance;
- budget calculations;
- payroll;
- settlements with founders;
- intercompany operations;
- Settlements with banks.
Auditor Objectives
During the verification process, the specialist must determine:
- Directions for which borrowed funds were spent, compliance of these goals with the terms of the contract.
- Composition of collateral or guarantees.
- Timeliness and completeness of repayment.
- The correctness of the deduction of interest.
- The validity and legality of obtaining loans from other entities.
The auditor should also check:
- Whether interest paid is allocated to expenses of the current period.
- Are the “Current section” items included in the current liabilities section.
- Are the indicators for overdraft items correctly determined.
During the audit, the specialist determines whether financial discipline is respected at the enterprise. Based on the results of the audit, recommendations are developed to improve the situation.
Recommendations of specialists
Analyzing the solvency of the current obligations of the company, the auditor must pay attention to a number of significant points:
- Are there supply contracts (production of works, provision of services), are they properly executed.
- If there is debt, the date and cause of occurrence should be determined.
- Are there any obligations for which the statute of limitations has expired.
- When accepting inventory items for which settlement documents were not received, it should be checked whether these objects are reflected in the number of paid, but on the way, or not taken out of suppliers' warehouses.
- Whether an inventory of settlement transactions was carried out. If necessary, a check is carried out.
- Whether material values are fully capitalized. For verification, information on the quantity and value of objects is compared with data from incoming documents (freight invoices, accounts) and indicators taken from the analytical accounting of settlement transactions with suppliers, as well as from stock books.
- Are the prices of material assets correctly determined, do they correspond to the value indicated in the supply contracts.
- Is the cost of the costs written off correctly?
- Have penalties been imposed on suppliers for breach of obligation.
- Are past due debts written off correctly.
- Have any complaints been sent to suppliers / contractors on non-compliance of tariffs and prices, including when making arithmetic errors, quality on technical conditions and standards, as well as on downtime and marriage caused by the fault of contractors / suppliers.
- When analyzing settlement operations, it should be established whether material values are provided with a source of financing, design estimates are drawn up for construction projects, and whether there are any additions in the volume of work performed.
- Are synthetic and analytical accounting conducted correctly.
- Does the information of the journal-warrant No. 3 correspond to the information given in the balance sheet and the General Ledger.
- Are the accounting records for current accounts compiled correctly.
Debt nature
On this basis, current liabilities are divided into normal and unjustified.
The former include debt due to economic necessity. For example, it may be a loan for the modification of equipment.
Unjustified debt refers to overdue liabilities to the budget, staff remuneration, suppliers on settlement documents that are not paid on time, etc. Its presence indicates a low solvency of the enterprise. If measures are not taken, this situation may lead to bankruptcy.
Debt indicators
The state of obligations at the beginning and end of the reporting period is characterized by the balances of the following articles:
- Short-term financial liabilities.
- Tax debts.
- Other payment obligations.
- Short-term payables and estimates.
- Other short-term debt.
Current liabilities ratio
The calculation of the amount of debt is carried out according to the following equation:
TO = + KZ + ON , in which:
- current liabilities - TO;
- borrowed funds - AP;
- accounts payable - KZ;
- Other liabilities - software.
To assess the degree of solvency, the coefficient of coverage of liabilities using only current assets is used. It is calculated by dividing assets by current liabilities. The higher the indicator, the correspondingly higher the solvency.
The formula is as follows:
K = current assets / current liabilities.
This equation is general. In practice, a formula is also used that allows you to calculate the groups of liabilities and assets:
K = (A1 + A2 + A3) / (P1 + P2) , in which:
- A1 - the most liquid assets.
- A2 - quick-selling tools.
- A3 - slow-moving assets.
- P1 - the most urgent debt.
- P2 - short-term liabilities.
The normal value of the coefficient is considered an indicator of 1.5-2.5. The specific value is set depending on the economic sector. An indicator less than one indicates a high financial risk. This suggests that the company cannot repay the obligations properly and on time. If the coefficient exceeds 3, then the capital structure is organized irrationally. Part of the funds is not involved in the turnover.