Question

What distinguishes a current liability from a long-term liability? Why is it so important to report these separately? How is this information used in decision-making applications?

Answer 1

Current Liabilities -​​​​​​ The liabilities which occur for a short term are known as current liabilities. These liabilities will generally be for 1 year. Some of the examples are,cash credit,bank overdraft,bills payable etc.

Long term liabilities - The liabilities which occur for more than one year will be long term liabilities. Examples of long term liabilities are Loans and advance etc.

The main difference between the current liabilities and long term liabilities is timing difference.

It is important to report these separately because it will be useful for company,share holders,and third party to make decisions accordingly.

This information will be useful in decision making for following

• Company-It will help company to decide about how much working capital should be maintained in company and how much reserves should be maintained to meet long term liabilities.
• Shareholders-It will be useful to decide whether to sell the shares or continue as share holders. It will be useful to know how much dividend they may receive.
• Third party​​ - It will be useful to decide whether to invest in the company or not.