What Is Current Liabilities? And How To Account for It?
Current liabilities refer to debts or obligations a company is expected to pay off within a year or less. These short-term liabilities must be settled shortly, typically within a year or less. Examples of current liabilities include accounts payable, wages payable, taxes payable, and short-term loans.
To account for current liabilities, a company must record them on its balance sheet, a financial statement listing a company’s assets, liabilities, and equity. The current liabilities section of the balance sheet typically appears at the top and includes all of the company’s short-term debts and obligations.
To record current liabilities, a company debits the appropriate liability account and credits the account used to incur the liability. For example, if a company owes $10,000 to a supplier for inventory purchases, the company would debit accounts payable for $10,000 and credit inventory for $10,000.
It’s important for a company to carefully manage its current liabilities because they can significantly impact the company’s financial health. If a company cannot pay its current liabilities, it may face financial difficulties, which can harm its reputation and ability to secure financing in the future.
What Is Non-Current Liabilities? And How To Account for It?
Non-current liabilities refer to debts or obligations a company is expected to pay off over more than one year. These are long-term liabilities that are not due within the next 12 months. Examples of non-current liabilities include long-term loans, bonds payable, and deferred taxes.
To account for non-current liabilities, a company must record them on their balance sheet, a financial statement listing a company’s assets, liabilities, and equity. The non-current liabilities section of the balance sheet typically appears below the current liabilities section and includes all of the company’s long-term debts and obligations.
To record non-current liabilities, a company debits the appropriate liability account and credits the account used to incur the liability. For example, if a company borrows $100,000 from a bank for five years, the company would debit long-term debt for $100,000 and credit cash for $100,000.
It’s important for a company to carefully manage its non-current liabilities because they can significantly impact the company’s financial health over the long term. Suppose a company is unable to make payments on its non-current liabilities. In that case, it may face financial difficulties, which can harm its reputation and ability to secure financing in the future.
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.
Type of 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 payable.
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.
10 Different Between Current Liabilities and Non-Current Liabilities.
Here are 10 differences between current liabilities and non-current liabilities presented professionally:
- Timeframe: Current liabilities are expected to be settled within one year, whereas non-current liabilities are expected to be settled over more than one year.
- Examples: Examples of current liabilities include accounts payable, wages payable, and taxes payable. Examples of non-current liabilities include long-term loans, bonds payable, and deferred taxes.
- Placement on Balance Sheet: Current liabilities are listed first on the balance sheet, followed by non-current liabilities.
- Liquidity: Current liabilities are considered more liquid than non-current liabilities, as they are expected to be settled soon.
- Interest Rates: Non-current liabilities typically carry higher interest rates than current liabilities, considered riskier for lenders.
- Repayment Terms: Non-current liabilities have longer repayment terms than current liabilities, ranging from a few months to a year.
- Impact on Financial Ratios: Current liabilities can have a significant impact on a company’s short-term liquidity ratios, such as the current ratio and quick ratio, while non-current liabilities can affect a company’s long-term solvency ratios, such as the debt-to-equity ratio.
- Consequences of Default: Failure to pay current liabilities can result in immediate consequences, such as late fees or legal action, while defaulting on non-current liabilities can lead to more severe consequences, such as bankruptcy.
- Management: Effective management of current liabilities is essential to maintaining short-term liquidity while managing non-current liabilities is important for ensuring long-term financial stability.
- Sources of Funding: Current liabilities are typically funded through short-term sources, such as trade credit or short-term loans, while non-current liabilities are financed through long-term sources, such as bonds or long-term loans.
is contract liabilities current or non-current liabilities
Contract liabilities can be either current or non-current liabilities, depending on the timing of when the contract is expected to be fulfilled.
If the contract is expected to be fulfilled within one year, the contract liability would be classified as a current liability. On the other hand, if the contract is expected to be fulfilled over a period of more than one year, the contract liability would be classified as a non-current liability.
For example, if a company receives advance payments from customers for services that are expected to be provided within the next 12 months, the advance payments would be classified as current contract liabilities. Conversely, if a company receives advance payments for services that are expected to be provided over a period of more than one year, the advance payments would be classified as non-current contract liabilities.
Is Capital a Current or non-current liabilities?
Capital is not considered a current or non-current liability. Rather, capital is a component of the owner’s equity section of the balance sheet, which represents the residual interest in the assets of a company after deducting its liabilities.
Owner’s equity represents the amount of the company that is owned by its shareholders, and is calculated as the difference between the company’s total assets and its total liabilities. Capital is typically a component of owner’s equity, representing the initial investment made by the owners in the company, as well as any additional investments made over time.
While capital is not considered a liability, it does have an impact on a company’s financial health and ability to meet its obligations. By investing capital into the company, owners are providing the company with the resources it needs to operate and grow, which can help ensure its long-term success.
Written by Sinra