Problem:
Tom Perry recently completed the first month of his landscaping business and has contacted you for help in preparing financial statements. While he understands that liabilities are the debts his business owes, he is a little confused about the difference between current and long-term liabilities. His business currently owes the following:
- Accounts owed to suppliers $500
- Mortgage on greenhouse $32,000
- 90-day note from bank $1,500
- 5-year loan to purchase equipment $10,000
In a memo to Tom, explain the difference between current and long-term liabilities, demonstrate the preparation of the liabilities section of his balance sheet, and discuss how he should record the liabilities of his business. Be sure to discuss the reporting of the current portion of his long-term debt. Also discuss the reporting of the interest he must pay on his loans.