Question

In your post, discuss current liabilities and long-term liabilities. What are the differences between the two? Illustrate your understanding of liabilities, making sure to identify major types of current liabilities.

Answer 1

Current Liability: Current liability is basically those liability of business which are due to be paid in a short period of time which is 12 months or within a single operating cycle. As name suggest "Current" which illustrates in a short span. or in a near future.

Long Term Liabilities: All liabilities which are not current liabilities are called long term liabilities. These are basically liabilities which are to be paid after a long period i.e. more than 12 months or after an operating cycle.

Reason of Categorisation: One must know the reason that why we are segregating liabilities into short term or long term. Its is due to for correct, true and fair representations of balances for stakeholder's. A stakeholder of a business must know how much buisness need to pay in near future which could helphim to derive the liquidity position of a company and also the long term financial health of the company. This segregation is also useful for calculation of various ratios which provide/describe financial situation, comparision, image of the company.

Reporting: Current liabilities are generally reported in order of their due days, long term liabilties are reported in order of their amount and cost i.e. rate of interest.

Examples: Current Liability: Interest Payable, Salaray Payable, Taxes payable, Short term bank loan, promissiory note

Long Term Liability: Bank Loans, Bonds and Debentures, deffered Tax, Post employmenet benefits.