6. Salaries and -wages aecrued.—This account would include the amount due and unpaid for claims of officers and employes or amounts due partners in respect of salaries and wages. The amount set up as a liability should be the amount accrued from the last date of payment.
7. Other liabilities.—Taxes accrued up to the date of a balance sheet should be shown as a current liabil ity. The account "taxes accrued," would also include the estimated portion of the Federal Income and Profits Tax accrued up to the date of the balance sheet. Rents accrued, royalties accrued and dividends declared and payable are examples of other liabilities that may be found in a balance sheet.
With reference to dividends, it is to be noted that until the board of directors has met and actually de clared and published the declaration of a dividend, that dividend is not a liability. It follows from this that unpaid dividends on cumulative preferred stock, not declared by the board of &rectors, are not a lia bility of the corporation. Nevertheless, they should be stated in a footnote in the balance sheet, because the failure to do so would mislead possible investors in the common stock of the undertaking.
8. Ratio of current assets to current liabilities.— The reader of the balance sheet of an undertaking will compare the ratio existing between current lia bilities and current assets. For example, the balance of the cash account would be considered in connection with the amount of wages and current liabilities due. With reference to loans payable, one would look for fluctuations. Thus, during the season in which an undertaking is acquiring its merchandise and getting it ready for market, there will be a constant increase in the amount of the outstanding accounts and notes payable. At the end of the season, or at the end of the normal fiscal year, one would expect to see the accounts payable reduced to an amount representing perhaps current bills not yet due. One would also expect to find that all the bank loans had been paid off. If loans for a relatively large sum were out standing at the end of the normal fiscal period or at the end of the season, it would be an indication that the concern was financing itself permanently on bor rowed capital. This proceeding might be a danger ous one, because the_loan might be called at any time and the firm might be unable to repay it on demand. A business should have a sufficient amount of owned capital to take care of its ordinary financial needs at the end of the fiscal or season period.
9. Deferred liabilities or deferred credits to in come.—Deferred credits to income consist of those items received in the current period which have not as yet been earned. These items should not properly be Credited to income in the present period and the credit to income is deferred until later. From the point of view of proprietorship, they are liabilities in that they represent the liability of the organization to deliver service in a later period. Thus, for example, a tenant may pay rent in advance and at the date of the bal ance sheet a certain portion of the rent paid in ad vance will have been earned and a portion will be un earned. The portion unearned is set up as a de ferred credit to income because it represents the rent service which the tenant is to enjoy from the landlord during the following period. Deferred liabilities are the reverse of deferred assets.
10. Contingent liabilities, as the reader will recall, are those which may or may not occur upon the happening of a certain event or contingency arising out of past transactions. The most common examples of contingent liability are those of liability under notes receivable which have been discounted and liability as guarantor of the principal or interest on the debt of another firm. The important features of the contingent liability on notes receivable discounted, have been considered. Liability as guarantor for the principal and interest of the debt of another is such a liability as a holding company might assume as guarantor of the principal and interest of the debt of a subsidiary. Contingent liabilities will be offset by contingent assets. Thus, the contingent asset offsetting the contingent liability for a note receivable discounted is the claim which arises against the maker of the note if the liability be: comes actual. Of course, the value of the contingent asset depends upon the ability of the maker to pay. Where one has assumed contingent liability as guar antor of the principal and interest of the debt of an other, the guarantor usually protects himself by tak ing security. If the security taken by the guarantor is equivalent to the amount of his liability, the con tingent asset is equivalent to the contingent liability; otherwise, of course, a loss results.