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Business Financials – Difference between current and non-current liabilities?
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Published on Thursday, 18 August 2022 16:21
Most businesses have liabilities at some stage or on-going liabilities – obligations that are to be paid soon or later (long term) and in accounting, they are divided into Current and Non-Current Liabilities.
Here we explain the difference -
Current Liabilities are obligations due/expected to be paid in the next 12 months or less from the date of a company’s balance sheet and will require the use of a current asset of cash (eg money in bank) or will require another current liability (if paid by debt such as credit card or loan).
Current liabilities are usually listed in the following order:
- Credit cards and overdraft accounts, loans less than 12 months;
- Accounts payable (trade creditors);
- The remaining current liabilities such as payroll taxes payable, superannuation, income taxes payable, interest payable and other accrued expenses.
Often, the parties who are owed current liabilities are called creditors. In special situations, a legal arrangement may be created that gives preference and then those parties are called secured creditors The majority of creditors are known as unsecured.
Non-Current Liabilities are liabilities that are to be paid over more than 12 months – often they are business or vehicle loans and financing such a Chattel Mortgage. Others include Long Service Leave Accruals, and Directors Loans.
Is the business solvent? This is an important question. One overall method that is used to determine if a business is trading in a solvent manner, is to check if the Current Assets are more than Current Liabilities.
Current Liability is also used in some financial ratios - such a:
These give an indication of the company health.
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