Liabilities (Non-Current and Current)

In relation to financial accounting, liability can be described as a financial commitment of the company to the creditors. One common issue for small business owners is accounts payable, sometimes referred to as money owed to suppliers. The balance sheet, a crucial financial document that displays a company’s assets and liabilities, is created by accountants using financial accounting software. Every business has some kind of commitment, with the exception of those that only use cash.

Liability Categories

Three categories are used to classify liabilities:

1. Current Liabilities (Identified also as short-term obligations)
2. Non-Current liabilities (Identified also as long-term liabilities) are obligations due after one year or more

• Contingent liabilities

Current Liabilities

The obligations that are related to finance and require settlement in the span of the year are called current liabilities or short-term liabilities. The present liabilities are required to be looked after by the management so that the company is in the state of having sufficient liquid assets to fulfill the obligations and burdens of debt.

Examples of Current Liabilities:

• Short-term loans
• Accounts payable
• Accrued expenses
• Interest payable
• Bank account overdrafts
• Bills payable
• Income taxes payable

Use of Key Ratios

Current obligations a significant part of the overall amount of short-term liabilities, are included in measures of short-term liquidity. Examples of indications that investors and management teams consider while performing a financial analysis of a company are the ones mentioned below.

Cash ratio

Cash ratio shows the liquidity capacity of the company to face the short-term obligations completely with cash and cash equivalents, in place of borrowing money for this purpose.

Cash ratio = (Cash + Marketable Securities) /Current Liabilities

 Quick ratio

It serves as a gauge of the short-term liquidity condition of an organization. It uses its most liquid assets, the cash on hand, to measure its ability to meet its short-term obligations. The Cash ratio and the Quick ratio are comparable.

Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities.

Current ratio

A company’s capacity to settle short-term debts, including those that are due within a year of the measurement date, is evaluated by a liquidity ratio. Current assets divided by current liabilities is the current ratio.

Non-Current Liabilities

Non-current liabilities are long-term obligations, or debts that are due more than a year from now. Long-term commitments are a major component of a company’s long-term finance. In order to get immediate funding for the acquisition or investment in new capital assets or projects, businesses take on long-term debt.

Non-Current Liabilities Examples:

1. Capital leases
2. Bonds payable

• Mortgage payable

1. Long-term notes payable
2. Deferred tax liabilities

Contingent Liabilities

One type of debt or obligation that could materialize at any point in the future is known as contingent liability. These are contingent upon certain circumstances taking place. One such example of a contingent obligation is legal fees paid as a consequence of a lawsuit. For instance, an organization is exempt from paying down the debt if it prevails in the litigation and incurs no expenses. The business must compensate the other party in the event that the firm loses the lawsuit. Another example of a contingent responsibility is a warranty. A business must have the funds to uphold the warranty agreement if its product has to be fixed or replaced.

How Do Liabilities Operate?

An unfulfilled or underpaid obligation between two parties is referred to as a responsibility. A monetary debt or financial liability, as used in accounting, is an obligation that is mostly based on previous business dealings, events, sales, asset or service swaps, or any other activity that would result in future financial gains.

• Current liabilities are usually classified as short-term since they are anticipated to be paid off in a year or less.
• Long-term liabilities are defined as those that are anticipated to be resolved over a period of 12 months or more.

Questions to Understand your ability

Q1.) What makes current liabilities different from other liabilities?

a) They’re paid off in over a year.

b) They need to be paid off within the year.

c) They only depend on future events.

d) They’re related to long-term debt.

Q2.) Which one is a non-current liability?

a) Accounts payable

b) Short-term loans

c) Bonds payable

d) Accrued expenses

Q3.) What does the Cash Ratio tell us?

a) How well a company can pay short-term debts with its liquid assets.

b) The company’s long-term financial health.

c) How much debt it has for the next 12 months.

d) The amount it can pay to shareholders.

Q4.) What exactly is a contingent liability?

a) A debt that must be paid immediately.

b) A debt that might happen depending on certain events.

c) A debt that comes from a loan.

d) A debt due in over a year.

Q5.) Which one of these is a current liability?

a) Capital leases

b) Deferred tax liabilities

c) Short-term loans

d) Long-term notes payable

Conclusion

Depending on their temporal nature, liabilities are classified as either current or non-current. They may include an upcoming obligation to render a service to others (for example, short-term or long-term finance from banks, people, or other enterprises) or a previous transaction that left an outstanding debt. The largest responsibilities, such invoices payable and obligations payable, usually comprise the most significant ones. Since they are essential to current and future operations, the aforementioned elements are frequently seen on the balance sheets of most organizations. Because they are used to finance operations and large expansions, liabilities are essential to a business. They also possess the ability to improve the effectiveness of business-to-business interactions.