Current Liability Versus Non-Current Liability, Essay Example

Liabilities are claims against the company’s assets and include current and non-current liabilities. Furthermore, liabilities also include the money or capital that the company owes other stakeholders in the firm.  Some of the major examples of liabilities in the firm may include accounts payable, payroll liabilities as well as notes payable. In most cases, the firm liabilities are presented as current and non-current liabilities in the financial statement of the company in order to promote and perform ratio analysis of the firm.

Current liabilities are debts that the firm plans to settle within twelve (12) months of the date on the balance sheet, and their settlement can be in term of cash on hand or in terms of current sale of inventory.  For example, unearned income that the company owes its employees in the form of wages is a current liability. In addition, wages payable and taxes payable are also examples of current liabilities.  Short-term notes payable such as working capital loan from the bank that is usually paid from the sale of inventories in the company is also a good example of current liability. Current liabilities records allow the company to determine what it owes others and how to pay them within 12 months. For example, working capital loan from the bank is usually paid from the collection of accounts receivable or sale of inventory in the company.  The major risks associated with current liability is that it is paid within one year using current assets in the firm such as cash money.

On the other hand, non-current liabilities are mainly debts that the company do not plan to pay within twelve (12) months. These debts extend or go beyond one year from the balance sheet date. They include long-term debts such as bonds payable, long-term capital leases as well as product or services warranties that extend beyond twelve (12) months.  Furthermore, it is evident that non-current liabilities indicates the firm long term financial obligations especially those that are not paid back within the present financial year thus they are listed on the firm balance sheet. Non-current liability also indicates the firm long term debt condition relative to its cash flow. The major risks associated with non-current liabilities is that it is paid or settled beyond one year after the balance sheet date. It is also not paid based on current assets thus can lead to financial challenges in the company.  Non-current liabilities is a necessary business aspect in the firm since it provides grounds for the acquisition of fixed assets in the firm. Non-current liabilities also promote the achievement of long-term goals and objectives in the firm.

The table below shows examples of current liabilities and non-current liabilities

Both current and non-current liabilities focus on the financial planning efforts of the firm in order to balance the firm cash-flow and collateral needs. This is because effective and profitable firms should work with positive cash flow. Failure to pay the firm liabilities usually results in financial problems in the firm thus the need for a proper record of current and non-current liabilities in the firm balance sheet.  Long-term liabilities or non-current liabilities are usually due within more than one year after the balance sheet date and indicate the long-term liquidity position of the company.

The firm vendors usually expect the company to have enough assets to pay current liabilities thus current liabilities indicate the financial health of a firm based on the current ratio. For example, a current ratio less than one indicate that the firm may not meet its short-term financial obligations and may stop operations.  This usually scares investors in the firm.

Therefore, the main distinction and difference between current and non-current liabilities is mainly in terms of the time period within which the liability is expected to be settled by the firm. For example, current liability is expected to be paid within one year from the reporting date while non-current liability is expected to be paid or settled after one year from the reporting date. Liabilities should be settled within specified operating cycle in order to provide stable financial condition and proper cash flow in the firm.  This will attract new investors to the firm.