Current liabilities is... the Degree of solvency in current liabilities

Current liabilities called the real debt of the organization, existing at the reporting date. Their maturity leads to the outflow of resources and a reduction in benefits. We next consider the composition and characteristics of the Current liabilities.

General information

Current liabilities – a debt arising out of transactions or economic operations in the past. They can be short or long term.

Short-term current liabilities repaid within the operating cycle or 1 year. All other debt is long-term.

Account Features

Operations on reception and repayment of short-term loans are recorded at Sch. 3010-3020. Analytics is conducted for each type of loan, private lenders.

An Overdraft is a kind of short-term loan granted in excess of the balance on the account and overdue loans are reported separately.

Degree of pay for current liabilities

Defined in the course of the audit. Objectives of the audit is forming an opinion about the expert:

• State of the accounting and internal control of the legitimacy of the debt.
• The Correctness of account transactions, including payment of taxes.
• Timely repayment of Current liabilities.

In the course of the audit are:

• Check of correctness of registration of primary documentation. It is the basis for the given Current liabilities.
• Validation of analytical and synthetic accounting, and their relationship.
• The Correctness of the transfer of information to the General Ledger and reporting, the use of the respective accounts.
• Assessment of internal control of accounting operations to repay the debt.
• Check the classification of obligations, availability of appropriate explanations in the notes to statements.
• Assessment of efficiency of use of credit funds.

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Object auditing

When checking the current liabilities are studied debt:

• Calculations with suppliers, customers, contractors, customers;
• Extra-budgetary contributions;
• Calculations with municipal and state agencies;
• Social security;
• Calculations with the budget;
• Pay;
• Calculations with founders;
• On-farm operations;
• Calculations with the banks.

Objectives of the auditor

During the validation process the specialist should determine:

• Directions that spent borrowed funds, compliance with these objectives, the terms of the agreement.
• The composition of the collateral or guarantees.
• Timeliness and completeness of repayment.
• The correctness of the deductions of interest.
• The Validity and legality of obtaining loans from other entities.

The Auditor also should check out:

• Related to whether interest paid for the expenses of the current period.
• Have you Included the article "Current portion" in the section short-term commitments.
• True if the specified performance articles overdraft.

During the inspection, the specialist determines whether the observed financial discipline in the enterprise. According to audit results develop recommendations for improving the situation.

Expert Advice

Parsing The capacity to pay current obligations of the company, the auditor needs to pay attention to a number of significant highlights:

• Whether the supply contracts (performance of works, provision of services), whether they were correctly filled.
• If you have debt, you should determine the date and cause of occurrence.
• Is There an obligation that the limitation period for which has expired.
• When taking inventory, the settlement documents which have not been received, check to see whether these reflected objects among the paid, but in-transit or exported from warehouses suppliers.
• Whether the inventory settlement transactions. If required is checked.
• Fully capitalized tangible assets. To verify compares data on number and value of objects with data receipt documents (waybills, invoices), and indicators derived from the analytical accounting of settlement operations with suppliers, as well as from the books of inventory.
• It is determined the prices of material values, if they match the value specified in the supply agreements.
• True if written-off costs.
• Were presented to providers penalties for breach of obligations.
• Whether the debt written-off with expired.
• Been to vendors/contractors claims on the non-compliance rates and prices, including the assumption of arithmetic errors, the quality of technical specifications and standards, as well as the downtime and marriage due to the fault of contractors/suppliers.
• The analysis of payment transactions, should be established, ensure whether the material values source of funding is project-estimate documents for construction of structures, whether additions to volumes producedworks.
• Correctly being synthetic and analytical accounting.
• Whether the information of the magazine-warrant № 3 the information given in the balance sheet and the Ledger.
• Properly maintained accounting records for current accounts.

Nature of indebtedness

On this basis the current liabilities are divided into normal and justified.

The first is the debt, due to economic necessity. For example, it may be loan modification of the equipment.

Call Undue debts overdue obligations toward the budget, personnel, pay vendors on the settlement documents not paid in time, and so Its presence indicates low solvency of the company. In case of failure, this situation may lead to bankruptcy.

Of debt

Status of obligations at the beginning and end of the reporting period is characterized by the remnants of the following articles:

• Short-term Financial obligations.
• Taxes.
• Obligations of other payments.
• Short-term accounts payable and estimated liabilities.
• Other short-term debt.

Ratio current liabilities

Calculation of the amount of debt carried by the following equation:

IT is = ZS + KZ + in which:

• Current liabilities – THAT;
• Borrowed funds – ZS;
• Accounts payable – KZ;
• Other liabilities –.

To assess the degree of solvency is the ratio of coverage at the expense of only current assets. It is calculated by dividing assets on a short-term current liabilities. The higher the index, the higher the pay.

The Formula is as follows:

To = current assets / current liabilities.

This equation is General. In practice, there is also a formula allowing to calculate in groups of assets and liabilities:

K = (A1 + A2 + A3) / (P1 + P2) in which:

• A1-most liquid assets.
• A2 – quick start means.
• A3 – millennarianism assets.
• P1-most urgent debt.
• P2-short-term liabilities.

The Normal value of the coefficient index of 1.5-2.5. A specific value is set depending on the economic sector. Index less than unity indicates high financial risk. This suggests that the company is unable to pay debts properly and in time. If the value of the ratio exceeds 3, the capital structure is organized rationally. Part of the funds not involved in the turnover.