Current Liabilities and Provisions

Liabilities which are to be cleared within a short period of time (typically a year or less) are considered to be current liabilities.

The following other Current Assets require special attention

Reserve/Provision for Taxation/Dividends

Certain liability side items like Reserve/Provision for Taxation, Reserve/Provision for Dividends, etc., have dual nature. They can be considered to be a part of :

Current Liabilities

They may be treated as being part of Current Liabilities, indicating an existing liability.

Reserve/Provision for Taxation
⇒ Taxes are due but have not been paid yet.
Reserve/Provision for Dividends
⇒ Dividends have been declared and provided for but have not been paid yet.

Non - Current Liabilities

They may be treated as part of Reserves (Non-Current Liabilities), indicating that they represent profits set aside.

Reserve/Provision for Taxation
⇒ Certain amount of profits are set aside for Taxes.
Reserve/Provision for Dividends
⇒ Certain amount of profits are set aside for Dividends.

The Tax or Dividend is not yet an ascertained liability and the profit is being set aside to meet the expenditure which may/would arise in the future.

How Possible?

The possibility to treat these items in a dual manner arises on account of the fact that the net effect of the journal entries for (a) recording creation of reserves and (b) recording outstanding expenses is the same.

Recording Outstanding Expenses

Where the Expenditure account has already been closed and the outstanding expenses are recorded thereon, the journal and ledger would be as follows.

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
31-12 2009	-	Expenses a/c To Outstanding Expenses a/c	Dr.	- -	8,000	8,000
31-12 2009	-	[For the amount of outstanding expenses brought into the books of accounts.]		- -	8,000	8,000
31-12 2009	-	Profit and Loss a/c To Expenses a/c	Dr.	- -	8,000	8,000
31-12 2009	-	[For charging the profit and loss account with the outstanding expenditure.]		- -	8,000	8,000

Recording outstanding expenses results in the expenditure being taken into account in the relevant/current accounting period.

Ledgers Show

Dr	Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
../../09 ../../09 ../../09 31/12/09	To ... To ... To ... To Outstanding Expenses a/c	— — — —	... ... ... 8,000	31/12/09 31/12/09	By Profit and Loss a/c By Profit and Loss a/c	—	2,40,000 8,000
			2,48,000				2,48,000

Dr	Outstanding Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
31/12/09	To Balance c/d	—	8,000	31/12/09	By Expenditure a/c	—	8,000
			8,000				8,000
				01/01/10	By Balance b/d	—	8,000

Net Effect

The net effect of the above two entries for recording outstanding expenses would be a charge against the current period profits and the creation of a liability (Outstanding Expenses a/c)

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
31-12 2009	-	Profit and Loss a/c To Outstanding Expenses a/c	Dr.	- -	8,000	8,000
31-12 2009	-	[For the charging the profit and loss account with the outstanding expenses.]		- -	8,000	8,000

All nominal accounts prefixed or suffixed by the terms prepaid, outstanding, pre-recieved, still payable etc represent personal accounts and would be an equivalent of either debtors or creditors depending on the nature of their balance and have to be treated accordingly. Accounts with debit balances (≡ Debtors) are shown on the assets side of the balance sheet and accounts with credit balances (≡ Creditors) are shown on the liabilities side of the balance sheet.

Where the Expenditure account has not yet been closed and the outstanding expenses are recorded before transferring the balance therein to the profit and loss account, the journal and ledger would be as follows : Show

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars	L/F	Amount
Debit	Credit
31-12 2009	-	Expenses a/c To Outstanding Expenses a/c	Dr.	- -	8,000	8,000
[For the amount of outstanding expenses brought into the books of accounts.]
31-12 2009	-	Profit and Loss a/c To Expenses a/c	Dr.	- -	2,48,000	2,48,000
[For charging the profit and loss account with the expenditure.]

Dr	Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
../../09 ../../09 ../../09 31/12/09	To ... To ... To ... To Outstanding Expenses a/c	— — — —	... ... ... 8,000	31/12/09	By Profit and Loss a/c	—	2,48,000
			2,48,000				2,48,000

Dr	Outstanding Expenditure a/c	Cr
Date	Particulars	J/F	Amount	Date	Particulars	J/F	Amount
31/12/09	To Balance c/d	—	8,000	31/12/09	By Expenditure a/c	—	8,000
			8,000				8,000
				01/01/10	By Balance b/d	—	8,000

Creating a Reserve

Reserves should be understood as profits kept aside for some purpose.

Accounts showing profits (say profit and loss account) show a credit balance. Transferring a credit balance from one account to another would result in the transferee account being credited and the transferor account being debited. This amounts to taking a credit balance from one account and placing it in another account.

This is what we do in creating reserves. Though, reserves are also created by charging profits, they are an appropriation of profits and not a charge on profits.

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
31-12 2009	-	Profit and Loss a/c To Reserve a/c	Dr.	- -	25,000	25,000
31-12 2009	-	[For the amount of reserve created out of profits.]		- -	25,000	25,000

Unlike in the case of the recording outstanding expenditure, the second account affected in the transaction of creating a reserve does not indicate a liability that has to be paid out.

Difference

Both recording an outstanding expenditure and creating a reserve result in a charge on profits. Both will result in a reduction of available profits. However, the effect on the second account is not the same.

Recording an outstanding expenditure would result in creation of an existing liability, which is generally treated as a current liability. Whereas creating a reserve would result in a reserve account (special nominal account) which is treated as a non-current liability.

Balance Sheet of M/s Free Flow Fluids as on 31^st December 2009
Liabilities	Amount	Assets	Amount
Capital ... Reserve ... ... ... Sundry Creditors Outstanding Expenses ...	5,00,000 ... 25,000 ... ... ... 1,10,000 8,000 ...	Plant and Machinery	4,25,000

Outstanding Expenses a/c which represents a liability goes into the Current area and the Reserve a/c which represents an appropriation of profit goes into the non-current area of the liabilities side of the balance sheet.

An account that appears in the

current area
represents an account that has been created through a charge on profits.
non-current area
represents an account that has been created through an appropriation of profits.

Thus, if Reserve/Provision for Taxation/Dividend is treated as

a current liability
(included in current liabilities), it represents an expenditure charged to the profit and loss account.
a non-current liability
(included in non-current liabilities), it represents an appropriation of profit.

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