Question

Differentiate between non current liability and current liability in three points

Answer 1

Answer:

A current liability is a liability expected to be paid in the near future ( one year or less ). A good example is Accounts Payable.

A non-current liability is a liability expected to be paid more than a year in the future. A good example is Notes Payable with a set payment date.

it is important that liabilities be correctly classified as either current or non-current liabilities so that readers of the balance sheet have a better understanding of the entity’s financial position ( example - bank asked to loan money )

There are times when you have to separate the current portion of a liability that has monthly payments over an extended period of time. This can be done by calculating the current portion of the liability ( the next 12 monthly payments ) and record that as a current portion of the liability. There is an offsetting account in the non-current liabilities ( called Current Portion of XXXX liability ) that has a debit balance that reduces the non-current liabilities.

Answer 2

The difference between current liabilities and noncurrent liabilities has been detailed below:

Meaning

• Current liabilities are those liabilities which are to be settled within one financial year.

• Noncurrent liabilities are those liabilities which are not likely to be settled within one financial year.

Credit period/term

• Current liabilities have credit period less than 12 months.

• Noncurrent liabilities have longer repayment terms in excess of 12 months.

Presentation in the balance sheet

• Current liabilities generally appear in only one balance sheet as they become due for payment and settlement within one financial cycle.

• Noncurrent liabilities appear across several consecutive balance sheets as they are payable over multiple years.

Impact on working capital

• Repayment of current liabilities reduces working capital of a business.

• Repayment of noncurrent liabilities does not impact working capital of a business. Interest payments on such liabilities however do impact working capital of the business.

Accrued due to

• Current liabilities generally accrue as a result of obligations arisen during day to day operations of the company.

• Noncurrent liabilities generally accrue as a result of more long term funding needs of the business.

Interest

• Current liabilities have short credit period and generally do not have any interest obligation attached to them.

• Noncurrent liabilities are due over several years and generally have an interest obligation attached to them.

Security

• As current liabilities arise due to day to day operations and have short credit periods, they generally do not have any security attached to them to cover repayment default.

• Noncurrent liabilities have longer terms and mostly have securities attached to them as guarantee for repayment. E.g.: a loan taken to purchase heavy machinery could have the machinery itself offered as a security to cover against repayment default.

Examples

• Current liabilities include short term creditors, short term loans, and utility payables.

• Noncurrent liabilities include long term bank loans, bonds debentures etc.

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