Current Liabilities and Non-Current Liabilities: Explanation and Example

Explanation:

The Concept of liability is also a critical part of preparing Financial Statements.

Based on the Conceptual Framework, the main essential characteristic of liabilities are that the entity has a present obligation.

The conceptual Framework also states that the obligation could be a duty or responsibility to act or perform in a certain way.

Obligations may be legally enforceable due to a binding contract or statutory requirement.

For example, the entity purchasing goods or rendering services from suppliers on credit and the cost of goods or services will be payable in the next 30 days.

This transaction creates a legal binding between an entity and suppliers. Such liabilities are called accounts payable and classified as current liabilities.

Loan payable, overdraft, accrual liabilities, and notes payable are the best example of liabilities.

But, these liabilities are differently classified as current liabilities (mean short term) and non-current liabilities ( mean long term).

Formula:

Accounting equation,

Assets = Liabilities + Equity

Therefore, to calculate liabilities, we can turn as follow:

Liabilities = Assets – Equity

+ Assets: In the balance sheet, assets records at the first class and total assets in the balance sheet show the total amount of net assets the entity has at the end of the balance sheet date.

+ Liabilities included current and non-current liabilities that the entity owes to its debtors at the end of the balance sheet date.

+ Equity is the investment fund that owners inject into the entity.

In the Statement of Financial Position, Liabilities are classed into two categories according to their nature. Those two classifications are Current Liabilities and Non-Current Liabilities.

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Type of Liabilities

Current Liabilities

The following video explains the concept of Liabilities. If you still do not clearly understand the text provided, we recommend you review the video for better understanding.

The following is the list of Current Liabilities items normally found in the Statement of Financial Position.

  • Account Payable as the result of purchasing the goods or rendering service on credit. In such credit, purchases are expected to pay within a short period, normally less than twelve months. If the expenses of the payable period are longer than twelve months, then this payable is classified as long-term.
  • Overdraft from as the result of an overdraw from the bank. The company normally has overdraft facilities with the banks, and interests are covered only for the overdrawn amount when the company withdraws money from the bank at the time of settlement.
  • Current Tax payable: The tax expenses that the company is willing to pay in a period shorter than 12 months. Current Tax payable results from any tax like salaries, VAT, withholding tax, prepayment tax, and monthly tax on profit.
  • Accrual Expenses as the result of expenses that occurred, but the invoices or credit notes have not been received. For example, for utility expenses, the invoice normally receives at the beginning of the next month. Therefore, the accrual expenses have to be recognized.
  • The company is willing to pay interest expenses no longer than 12 months.
  • Short-term Debt that the company is willing to pay no longer than 12 months.
  • Loan payable(*) is the current portion of the loan that the company is expected to pay within 12 months from the reporting date.
  • Others Current liabilities are the other type of small payables.
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Non-Current Liabilities

The following are the Non-Current Liabilities items normally found in the Statement of Financial Position.

  • Long-Term Debt: The debt that is overdue over 12 months. The terms and conditions of the debt are normally found in the debt agreement. Those balances and amounts that need to be paid within 12 months, that amount needs to be classed as Current Liabilities, and the rest are classed as Non-Current Liabilities.
  • Noted Payable Over 12 Months. Sometimes the company purchase goods or the rendering of service from suppliers, and the term of payments is over one year; therefore, this Noted Payable is classified as long-term.
  • Bond Payable is the obligation of the company to pay the bond over 12 months.
  • Long-term Lease is the transaction to a records finance lease; the lease should be classified as long-term or short-term. The standard has changed the accounting treatment for operational and finance leases.
  • Loan payable(*) is the non-current portion of the loan that the company is expected to pay in more than 12 months from the reporting date.

It is important to note that the loan payable is classified into current and non-current liabilities. The current portion of loans expected to be paid within 12 months from the reporting date is classified as current liabilities. A non-current portion of loans scheduled to be paid in more than 12 months from the reporting date is treated as non-current liabilities in the balance sheet.

Written by Sinra