Most businesses have liabilities –
Payments that are to be paid soon or later (long term) and they are divided into Current and Non-Current in the accounts.
Current Liabilities are obligations due/expected to be paid within 12 months or less of the date of a company’s balance sheet and will require the use of a current asset (eg money in bank) or will create another current liability if paid by debt or loan.
Current liabilities are usually listed in the following order:
- Credit cards and overdraft accounts, loans less than 12 months;
- Accounts payable (trade creditors);
- The remaining current liabilities such as payroll taxes payable, superannuation, income taxes payable, interest payable and other accrued expenses.
Often, the parties who are owed current liabilities are called creditors. In special situations, a legal arrangement may be created that gives preference and then those parties are called secured creditors. The majority of creditors are known as unsecured.
Non-Current Liabilities are liabilities that are to be paid over more than 12 months – typically they are business or vehicle loans and financing such a Chattel Mortgage. Others include Long Service Leave Accruals and Directors Loans.
Is the business solvent? This is an important question. One overall method that is used to determine if a business is trading in a solvent manner, is to check if the Current Assets are more than Current Liabilities.
Current Liability is used in some financial ratios – such as:
- Working capital (current assets minus current liabilities) and the company’s
- Current ratio (current assets divided by current liabilities).
These give an indication of the company health.
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