It is standard accounting procedures, or GAAP, to make a journal entry to remove the current year’s principle from the long-term liabilities. This entry reduces the long-term liabilities and increases the current liabilities. You are the bookkeeper for Biker’s Business. Biker’s Business has a bank loan that requires a current ratio of 1.5 times. The owner has asked that you not make the adjusting entry to take the current portion from the long-term liabilities. You know if you make the adjusting entry Biker’s Business’s loan will need to be repaid immediately (or the loan called). What should you do?

Question

It is standard accounting procedures, or GAAP, to make a journal entry to remove the current year’s principle from the long-term liabilities. This entry reduces the long-term liabilities and increases the current liabilities. You are the bookkeeper for Biker’s Business. Biker’s Business has a bank loan that requires a current ratio of 1.5 times. The owner has asked that you not make the adjusting entry to take the current portion from the long-term liabilities. You know if you make the adjusting entry Biker’s Business’s loan will need to be repaid immediately (or the loan called). What should you do?

Answer 1

As the bookkeeper for Biker's Business, you are responsible for following standard accounting procedures, which includes making adjusting entries to accurately reflect the financial position of the company. GAAP requires that the current portion of long-term liabilities be recorded separately as a current liability. This ensures that the company's financial statements provide a true and fair representation of its financial health.

In this scenario, not making the adjusting entry to remove the current year’s principal from the long-term liabilities may result in misrepresentation of the company's financial position. If the loan agreement requires a current ratio of 1.5 times and the adjustment is not made, the loan would technically be in violation of the agreement, making it possible for the loan to be called or immediately due for repayment.

To handle this situation, it is important to communicate the implications of not making the adjusting entry to the owner of Biker's Business. Explain that by not following GAAP, the company's financial statements could be misleading, which may affect the company's credibility with stakeholders, lenders, or potential investors. Discuss the possible risks involved, including the potential for the loan to be called due to a violation of the loan agreement.

Ultimately, the decision lies with the owner of Biker's Business. However, as the bookkeeper, it is your responsibility to provide accurate and reliable financial information. If the owner still insists on not making the adjusting entry, make sure to document all your communication regarding this matter for future reference.