Question

Distinguish between Current/Short term Liabilities and Non-current/Long term Liabilities.

Illustrate your answer with journal entries as examples.

Answer 1

Liabilities are something that a company or a person owes especially money, services, etc. They represent the obligations of a company or a person.

Liabilities can be Short term- Current liabilities or Long term liabilities. Short-term liabilities are known as Current liabilities while long term liabilities are known as Non-current liabilities. Short term liabilities/Current liabilities are liabilities that are obligations or services that are owed by a company in the near future. Usually short term liabilities are liabilities that occur within the next 1 year. Few examples of short term liabilities are :-

1.) A company purchased inventory on credit , to be paid within 3 months:-

Particulars	Amount	Amount
Inventory A/c	XXX
To Accounts Payable A/c		XXX
(to record the purchase of inventory on credit)

2.) Salaries payable that are due for 2 weeks to its employees

Particulars	Amount	Amount
Salaries expense A/c	XXX
To Salaries Payable A/c		XXX
(To record the salaries payable)

Long term liabilities are liabilities that are non current and long term in nature. These are generally the liabilities that are expected to be paid by the company on a long term basis. They are generally due after one year. Long term liabilities include Loans , mortgages, bonds payable, Debentures, pension obligations, etc. The obligations are not immediate and hence they are classified as Long term liabilities. Few examples of long term liabilities include:-

1.) ABC company issued Bonds payable for cash of $1 million.

Particulars	Amount	Amount
Cash A/c	XXX
To Bonds Payable A/c		XXX
(To record the bonds payable)

2.) DEF company borrowed a loan of $5 million to finance its purchase of a new machine

Particulars	Amount	Amount
Cash A/c	XXX
To Loan Payable A/c		XXX
(To record the proceeds from a loan and its related liabilities)

Please let me know if you have any questions via comments. All the best :)

Answer 2

Liabilities are one of the items shown in balance sheet. They are used as a claim against company's assets. These assets can be classified as current or non-current in nature. They are usually owed by a company to other parties. For instance accounts payable, payroll liabilities, notes payable.

Current liabilities are those which can be paid within a period of 12 months in relation to date of balance sheet. These can be paid either by use of the assets or exchanging one liability for another. Examples of current liabilities would be accounts payable, dividends payable, short-term notes payable.For instance in case an expense is incurred, then it is recorded as an accrued liability and journal entry would be:

Expense A/c Dr xxxx

To Expense Payable A/c xxxx

In case payment is made for the same, journal entry would be:

Expense Payable A/c xxxx

To Cash A/c xxxx

Non-current liabilities are those which cannot be paid within a period of 12 months as per balance sheet date. Examples would be bonds payable, long-term leases. For instance, in case of bonds payable, it is issued on the difference between coupon rate and actual interest. In case coupon rate is higher than actual interest, bonds are issued at a price higher than face value and the journal entry for the same would be:

Cash (a+b)

To Bonds Payable (a)

  To Bonds Premium (b)

In case coupon rate is lower than actual interest, bonds are issued at a discount and journal entry would be :

Cash (b)

Bonds Discount (a-b)

To Bonds payable (a)

In case coupon rate is same as actual interest, journal entry would be:

Cash (a)

To Bonds Payable (a)

In case of booking of interest expense, journal entry would be:

Bond interest/expense (b)

To Cash/Bank (b)

Answer 3

Current liabilities are liabilities which are to be paid within 1 year or the normal operating cycle of the business, whichever time is longer. These liabilities are generally paid from the realization of current assets. Examples of current liabilities –Sales Tax Payable, Accounts Payable, Accrued income taxes, etc

Journal Entry for current liabilities. There is 6% sales tax. If company sells goods with a sales price of $1,000 on credit, journal entry will be -

Accounts Receivable Debit                   1060

Sales credit                                              1000

Sales Tax Payable                                   60

Journal Entry at time of payment of sales tax –

Sales tax payable Debit                         60

Cash Credit                                              60

Non – current liabilities are the obligations that are to be paid after one year or normal operating cycle of the business. Example of non-current liability – Mortgage loans, bank notes, etc.

Journal Entry for non-current liabilities – Bank loan taken for $100000

Bank Account Debit      100000

Bank Loan Account Credit 100000

Now, this bank loan will be paid after a time period mentioned above.

Answer 4

Solution:

PART A:

Difference between Current and Non-Current liabilities is as follows

Basis	Non-Current Liability	Current Liabilities
Meaning	Liability of the business that is due beyond one year or the normal operating cycle of the business	Liability which is due within one year or the normal operating cycle of the business, whichever is longer
Example	Mortgage loans, Debentures, Long term loans.	Accounts payable, short-term bank loans, accrued income taxes.
Cause of Liability	This arises due to raising long term loans generally for purchase of expansion or purchase of non-currents assets	Day to day operations of Business results rise of current liability
Impact on Working Capital	This increases the non-current liabilities like bank loans, public deposits. Hence do not impact working capital.	Reduce the working capital funds available to a business.
Presentation in the balance sheet	This appears in multiple balance sheets over the years as they are payable over multiple years.	Generally, appear in the only one-year balance sheet as they become due for payment and settlement within one financial cycle.

Part B:

Journal entry example

Current Liabilities: Goods Purchased worth $ 1000 on Credit this increases the account payable account.

Date	Particular	Amount Dr	Amount Cr
	Purchase A/c. Dr	$ 1000
	To Accounts Payable		$ 1000
	( Being goods purchased on credit)

Non-Current Liabilities: Fund Raised through mortgage loan $ 50,000

Date	Particular	Amount Dr	Amount Cr
	Bank A/c. Dr	$ 50,000
	To Mortage Bank Loan		$ 50,000
	(Being long term loan raised)

Note:

1. Like we classified liabilities on the basis of the time period into current and non-current. In a similar way, classification is done for assets that are Current assets like account receivable and Non-current assets like land.