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

Solution. We categorize liabilities under current liability account when they are needed to be met by the organization within one accounting period under consideration such as accounts payable etcetera. Whereas, long-term liability are the ones which becomes due after one accounting year period such as deferred income taxes, revenues etcetera.

As above suggests categorizing current liability separately from long-term liability while book keeping helps an organization in meeting its current expenses for smooth operation of business activities with the amount available at hand which in turn will help organization build trust with outside parties. Meeting current liabilities will lead to determining organization's capacity to meet long-term liability.

An organization's basic objective remains to minimize costs and maximize profits, which requires preparation of financial statements to keep track on its different activities. Recognizing and recording of current and long-term liabilities helps in determining organization's capacity of meeting expenses during the accounting period and helps determining profit or loss percentage from such investment. It facilitates in decision making applications by calculating organization's working capital ratio and achieving reports on current assets to liabilities of organization.