Non-current liabilities are obligations to be paid beyond 12 months or a conversion cycle. It is just opposite to current liabilities, where the debts are short-term and its maturing is with twelve months.
Non-current liabilities arise due to the company availing long term funding for the business requirements. Businesses also need to acquire the financing of capital expenditure from time to time.
The business sense states that short term obligations shall be serviced out by current assets. However, during recent times, non-current or popularly long-term liabilities also seem to meddle and service the growing working capital requirements.
Capital expenditures include the acquisition of plant assets and property. These get the funding from long term liabilities such as bank loans, public-deposits, term loans from related parties, etc.
Examples of non-current liabilities include:
- Bank loans which have a term exceeding one year
- Debentures, bonds, and even public deposits are going to mature or have conversion rights after one year.
- Long term employee benefit payables such as gratuity, pension, etc.
- Term loans from related parties like directors for more than one year.
Accounts payable represents the purchases that are unpaid by the enterprise. The accounts payable form the most significant portion of the current liability section on the company’s financial statements.
During the conversion cycle, companies match the payment dates with accounts receivables making sure that receipts are made before making the payments to the suppliers.
Lower the accounts payable days, the better. It reflects that the company can adequately realize the cash.
An example would be: Versace Ltd bought textile garments from Kitra Textile traders as raw materials on credit. Versace Ltd here got the inventory as a current asset while creating a short-term obligation on the other hand.
Accounting treatment in Financial Statements
Accounts payable fall under current liabilities section which falls under liabilities part of the Balance sheet as shown below:
|Liabilities and capital||Amount ($)||Assets||Amount ($)|
|Shareholders’ equity||X||Non – current Assets||X|
|Non-current liabilities or Long term Liabilities|
|Term Bank Loans||X|
|Other current Liabilities||X|
Why are accounts payable a current Liability and not non-current liabilities?
First of all, the similarities between accounts payable and current liabilities need to be explored.
The common characteristics below conclude why accounts payable is within current liability:
- Both are short term obligations to meet within the year.
- Accounts payable is a subset of current liability.
- The significant portion of working capital requires the management of accounts receivable and accounts payable, both contributing to a healthy cash conversion cycle and so does current liabilities as a whole.
- Both accounts payable and current liabilities are the results of a past transaction that obligates the entity.
The differences between the features of accounts payable and non-current liabilities are explored below:
|Basis||Accounts payable||Non-current Liabilities|
|Meaning||It represents the purchases that are unpaid by the enterprise.||It generally represents the long term liabilities to fund capital expenditures|
|Periodicity||Accounts payable are obligations to be met within a year.||These have long term obligations to be met after a year or more than a year.|
|Conversion||Accounts payable to cash payment forms part of the cash conversion cycle||It does not intrude on the conversion cycle of goods.|
|Accounting treatment||It falls under the current liabilities section of the balance sheet.||It forms other portions like the current liabilities section in the balance sheet.|
|Inclusion||It includes individual suppliers account||It includes bonds payable, gratuity payable, debts, and alike.|