Liabilities (Non-Current and Current)

Liabilities (Non-Current and Current)

When it comes to financial accounting, the definition of liability is a company’s financial obligations to creditors. Accounts payable, often known as money owing to suppliers, are a typical liability for small business owners. Accountants use financial accounting software to create a company’s balance sheet, an essential financial statement that shows a company’s assets and liabilities. All businesses, except those that rely solely on cash, have obligations of some sort.

Categories of Liabilities

Liabilities are classified into three categories: 

• Current liabilities (also known as short-term obligations) are due and payable within one year of the date of the accrual of the liability

• Non-current liabilities (also known as long-term liabilities) are obligations due after one year or more

• Contingent liabilities are obligations that may or may not exist due to the occurrence of a specific event

Current Liabilities 

Definition: Financial obligations that must be settled within a year are known as current liabilities, often referred to as short-term liabilities. Management should keep a careful eye on the company’s present liabilities to ensure that it has enough liquid assets to cover its debts or obligations.

Current Liabilities Examples:

• Short-term loans 

• Accounts payable

• Accrued expenses 

• Interest payable 

• Bank account overdrafts 

• Bills payable 

• Income taxes payable 

Key Ratios Used 

Short-term liquidity measurements include current obligations, which are a crucial component of the total amount of short-term liabilities. The indicators listed below are examples of those that management teams and investors consider while conducting a financial study of a business.

• Cash ratio 

It is a liquidity indicator that indicates a company’s capacity to meet its short-term obligations entirely with cash and cash equivalents, as opposed to borrowing money to do so. Cash ratio = (Cash + Marketable Securities) / Current Liabilities.

• Quick ratio

It is an indicator of a company’s short-term liquidity position. It gauges its capacity to satisfy its short-term obligations with its most liquid assets, the cash on hand. This ratio is similar to the Cash ratio Quick ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities.

• Current ratio

A liquidity ratio assesses a company’s ability to pay short-term obligations, such as those that are due within one year of the measurement date. Current Ratio = Current Assets /Current Liabilities.

Non-Current Liabilities 

Definition: Long-term liabilities, or debts due more than a year from now, are referred to as non-current liabilities. A company’s long-term finance relies heavily on long-term obligations. Companies take on long-term debt to secure quick funds for the purchase or investment in new capital assets or projects.

Non-Current Liabilities Examples:

• Capital leases 

• Bonds payable 

• Mortgage payable

• Long-term notes payable

• Deferred tax liabilities 

Contingent Liabilities 

• Contingent liabilities are liabilities that may arise due to the outcome of an unforeseen event in the future

• As a result, contingent liabilities are liabilities that may occur in the future

• For instance, if a firm is sued for $100,000 and the action is successful, the company will be liable for the amount of the lawsuit

• On the other hand, if the effort is unsuccessful, no blame will be established

• According to accounting standards, a contingent liability is only recognised if the liability is likely to occur (defined as more than 50 per cent likely to happen)

• It is possible to get a reasonable estimate of the resulting liabilities

• Contingent Liabilities examples: product warranties, lawsuits 

Difference between Current Liabilities and Non-Current Liabilities 

The following are the key distinctions between a company’s current and non-current liabilities:

Concept: 

• Current Liabilities

It is made up of liabilities that must be written off within a financial year or business cycle, as the case may be. They are referred to as short-term liabilities.

• Non-current Liabilities

These liabilities are typically written down over several years or business cycles. They are referred to as long-term liabilities.

Treatment in Accounting:

• Current Liabilities

In the Balance Sheet, it appears on the right side of the page, above the heading ‘Non-Current Liabilities.”

• Non-current Liabilities

This information is reported on the right-hand side of the Balance Sheet beneath “Current Liabilities.”

Examples: 

• Current Liabilities

Current liabilities include accounts payable, short-term loans, trade payables, and past-due amounts, to name a few examples.

• Non-current Liabilities 

Non-current obligations include debentures, mortgage loans, and bonds, to name a few examples.

Conclusion 

A liability is a present obligation of the firm originating from past events that are expected to result in a resource outflow containing an economic value. Liabilities are debts due to another individual or company. Current liabilities are debts or commitments due within a year. Management should closely monitor current liabilities to ensure that the company has enough liquidity to meet its obligations. Non-current liabilities are debts or commitments due in over a year. Long-term obligations are vital to a company’s financing. Companies take on long-term debt to fund capital purchases or new capital projects. Long-term commitments determine a firm’s long-term solvency. A company’s solvency is at risk if it cannot pay its long-term responsibilities on time.