Liabilities are the fund that a firm owes to external companies. These could be interest on bonds that are issued to utilities, rent, and salaries, bills to pay to suppliers. In every business, liabilities are declared against the company’s assets. In other words, liabilities are the sacrifices of economic gains a company make to other entities as an outcome of past transactions or events.
These liabilities are classified into two different types
- Current liabilities
- Non-current liabilities
Current liabilities are those liabilities that are due to clear within one year of the date mentioned on the balance sheet. The settlement is made by utilizing current assets like cash on hand or by the sale of the inventory.
In simple words, current liabilities are short-term liabilities debts or obligations that demand to be paid within a year. The management should observe these liabilities strictly to make sure that the firm holds enough cash from current assets, and ensure that the debts or obligations can be renumerated on time.
Examples of Current Liabilities:
- Accounts due
- Due on Interest
- Due on Income taxes
- Bills payable
- Overdraft Bank account
- Accrued expenses
- Short-term loans
Non-current liabilities are long-tern liabilities, obligations, debts which are due after one year.
These long-term liabilities are an essential source of a firm’s long-term funding. Most of the companies use long-term debt to obtain instant money to fund the acquisition of capital assets or make an investment in new capital projects.
The long-term liabilities are important in planning a business’s long-term stability. If an organization is not able to pay its long-term liabilities on its mentioned due date, then the firm will face a stability crisis.
Examples of non current liabilities:
- Due payment on bonds
- Long-term notes due
- Deferred tax liabilities
- Mortgage Outstanding
- Capital on lease
If a firm has a loan that requires to make a monthly payment for several years, then only the principal due in the next one year(12 months) is reported on current liability. The outstanding principal amount should be recorded as a non-current liability of the balance sheet.
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