Page 63 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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earned by its employees but not yet paid to them. When a com-
pany keeps its accounting records on the accrual basis (refer to
Chapter 5 for a discussion of accounting methods), such liabili-
ties are recorded when they become owed, even though they
don’t actually have to be paid until later on. The only exception
would be those companies that pay employees on the last day of
their workweek, in which case at the end of a payday they would
not owe any money to their employees—until the following day.
Other Accrued Liabilities
In the same fashion that Wonder Widget records its payroll
earned but not yet paid, a company will usually have other such
liabilities as well. These may be expenses the company has
incurred, but for which it has not yet received an invoice to
record. In order to make sure the expense gets recorded into
the right accounting period, the company’s accountants will
accrue the liability rather than wait for an invoice to arrive or a
check to be issued. Examples might include large purchases for
which the supplier has not yet invoiced the company or interest
expense on a loan that doesn’t get invoiced, but for which the
bank will automatically charge the company.
Notes Payable and Other Bank Debt
Loans from banks and others that represent borrowed money
and not simply trade accounts with suppliers are always shown
separately because the loans and the repayments typically have
special terms. When you see notes payable to anyone, particu-
larly banking institutions, you can be pretty sure the company
has agreed to some kind of limitation on its range of activity,
called covenants, as a way of ensuring the ultimate repayment
of the loan.
While borrowing to finance the business will be discussed in
Chapter 10, you should keep in mind that when such loans
appear on the balance sheet, you can expect to see other kinds
of guarantees provided to the lender, such as pledging assets as
collateral, a personal guarantee of repayment by the owners of