In accounting, a liability represents an obligation that companies accumulate due to past events. Similarly, it results in an outflow of economic benefits during a future period. In simpler words, liability is any amount owed to third parties that companies must settle. This settlement can occur any time in the future. Based on the terms of the liability, it may happen within a few days, or it may take several years.
Companies present their liabilities in the balance sheet. This financial statement also includes assets and equity. Usually, companies report these amounts as a total to report they fit in the accounting equation. However, accounting standards also require companies to separate their assets and liabilities. This classification occurs by segregating those elements into current and non-current portions.
For liabilities, the non-current portion is usually more crucial for stakeholders. However, that does not imply that current liabilities are unnecessary. Companies account for non-current liabilities in several steps. Before understanding that, however, it is crucial to discuss what non-current liabilities are.
What are Non-Current Liabilities?
Non-current liabilities are long-term obligations that companies must settle in the future. In accounting, debts falling within the next 12 months falls under current liabilities. On the other hand, those expected to require a settlement after a year are classified as non-current liabilities. Essentially, the non-current portion includes long-term liabilities and debts. For most companies, these include long-term finance acquired from third parties.
Non-current liabilities include any obligations or debts that companies expect to pay after 12 months. It is the definition set under accounting principles. Practically, companies may settle these debts before a year. However, if they do not expect to do so, they must classify it as non-current liabilities. On the other hand, any debts with an estimated settlement of less than a year become current liabilities.
Usually, non-current liabilities include items that contribute to a company’s capital structure. These debts are crucial in helping companies fund their operations. Non-current liabilities are similar to equity. In most cases, they also become a part of the capital employed. Essentially, both elements help companies run their operations in the long term. While equity comes with dividend payments, liabilities incur interest expenses.
Non-current liabilities classify on the balance sheet separately from current liabilities. As mentioned above, this listing is crucial in presenting short- and long-term obligations. However, this treatment only occurs to the balance sheet. The other financial statements do not require companies to report debts based on their settlement date. Therefore, non-current liabilities are only native to the balance sheet.
What are the Types of Non-Current Liabilities?
Non-current liabilities include all long-term debts and obligations that companies may obtain. Under that definition, this heading may contain various items on the balance sheet. Some of those include the following.
Long-term borrowings are one of the most prevalent items under non-current liabilities. Usually, these include any debts obtained from lenders for a long time. For this purpose, the payment period for these borrowings must fall after 12 months. Any long-term borrowings that require settlement within the next year will become a current liability. Usually, companies obtain long-term debt for long-term projects.
Leases are another prevalent item under non-current liabilities. However, they do not include finance obtained from lenders. Instead, leases involve using a lender’s assets in exchange for a settlement. In some cases, this asset will get transferred to the company at the end of the lease period. If leases last longer than 12 months, they will fall under non-current liabilities.
Companies classify loans as separate balance sheet items, although they can fall under long-term debts. Usually, this classification is necessary to present secured and unsecured loans separately. For companies, loans are crucial in running the business in the long term. These can come from any party. However, they usually include financial institutions or lenders.
Provisions include expected payments to a third-party based on accounting principles. They may not constitute actual liabilities or obligations. If companies believe there is a probability for a settlement to occur, they must record it as a provision. When companies expect to pay these provisions after 12 months, they will classify as non-current liabilities.
Deferred tax liabilities
Deferred tax liabilities represent a timing difference between tax payments and liabilities. In accounting, companies must record these items to report those differences. Usually, deferred tax liabilities fall under non-current liabilities. Although these amounts do not involve a future settlement, they are crucial in accounting. Deferred tax liabilities also explain any difference in the income between several periods.
How to Account for Non-Current Liabilities?
The accounting for non-current liabilities is similar to the treatment for any obligations. However, it involves various stages. At each stage, the accounting treatment for non-current liabilities will differ. Firstly, when a company obtains long-term debt, it must record it as an obligation. This treatment involves increasing liabilities while increasing assets. Usually, the assets come as finance from a lender or another party.
During the time a company holds these liabilities, it must pay interest to the lender. However, this treatment does not apply to all non-current liabilities. For example, provisions and deferred tax do not require interest payments. Nonetheless, companies must record a contractual interest expense on the obligations. This treatment for non-current liabilities is similar to other debts.
If the non-current liability requires a settlement within 12 months, companies must reclassify it. This treatment requires recording the non-current obligations under the current portion. At the end, when a company repays its non-current liabilities, it must remove the balance. After this treatment, non-current liabilities do not require further accounting.
The actual accounting treatment for non-current liabilities occurs through its presentation. This process requires separating any obligation expected to be repaid within 12 months from others. However, it does not entail using accounting entries. Instead, it only separates those balances on the balance sheet. Companies report their non-current and current liabilities under separate headings.
What Are the Journal Entries for Non-Current Liabilities?
There are no journal entries for non-current liabilities. If an obligation falls under the non-current portion, companies must treat them like other debt. As stated above, this process involves various stages. Firstly, companies must record a liability when it meets the definition set by accounting principles. The journal entries will be as follows.
At this point, it may not be clear whether the liability is current or non-current. During the time a company holds these liabilities, it must pay interest. Usually, companies record it using the following journal entries.
Similarly, companies will keep repaying some amounts from these liabilities. Any repayment for non-current liabilities will usually have the following journal entries.
During this period, the non-current liability may become payable during the next 12 months. However, it does not require separate journal entries. Companies must change the classification for that obligation to current instead of non-current.
A company, ABC Co., has the following liabilities with the expected settlement dates.
ABC Co. must report the above liabilities undercurrent and non-current portions. Based on the above settlement dates, the presentation will be as below.
|Total Non-Current Liabilities
On the other hand, current liabilities will include the remaining amounts.
Non-current liabilities are obligations that companies expect to settle within 12 months. Usually, they include long-term debt, leases, provisions, deferred tax liabilities, and loans. The accounting for non-current liabilities does not require different journal entries. Instead, it involves separating obligations based on their expected settlement dates.