Question

Explain to me the difference between the designation of Current & Non-Current Liabilities, and why is it important to understand this difference:

Answer 1

Liabilities are the obligations which are owed by the business to its creditors, employees and loans taken from banks etc. It is the amount payable in future period in the course of business.

The liabilities based on the terms of payment i.e when it will be payable are classified as Current liabilities and non current liabilities.

Current liabilities are those liabilities or obligations which are to be settled within 1 year from the closing date of financial statements, This liabilities are of short term nature and are settled within the normal operating cycle of the business.

Non current liabilities are those liabilities or obligations which are to be settled beyond 1 year i.e This liabilities are long term liabilities and are Payable and carried on the balancesheet beyond the normal operating cycle.

Current liabilities are used and takes care of the liquidity decision of the business whereas non current liabilities are used and take care of the solvency decisions.

Importance to understand this difference :

1. Helps in bifurcation of the liabilities in balancesheet as both are shown in seperate line item in the balancesheet.

2. Helps in analysis of the liquidity and the solvency of the firm over the years i.e the business should be generating sufficient funds to pay its future obligations and short tem liabilities.

3. This bifurcation prevent the default risk by analysing how much funds or cash flows are required in short term and in longer term.