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Classification of liabilities as current

Classification of liabilities as current or non-current is not that important

Question. Classification of liabilities as current or non-current is not that important.  The money is paid out eventually anyway, so what's the big deal?  Discuss. 

In a classified balance sheet, the assets and liabilities are presented in the form of current assets, current liabilities, fixed assets, long term liabilities, shareholders equity, etc. in order so that the viewer and the reader are able to grasp the essence of the financial position at a glance. So, the basic process and duty of the reporting entity are to separate what's current and what's non-current.

Current liabilities are termed as so if they are found to be expected to be settled within the present operating cycle of the reporting entity or they are  held for trading purpose or the liabilities  are also expected to be settled within the next twelve-month period form the operating cycle reported date or the reporting entity is not entitled to defer the settlement of the said liability unconditionally for at least a period of 12 months from the date of reporting the same. Simply speaking the current liability is a liability which needs to be paid in the next 12 months form the reporting date(Carl S. Warren and James M. Reeve, 2012, 12th edition).

On the other hand, the long term liabilities are not expected to be settled within the present operating cycle of the reporting entity nor they are expected to be settled within the next twelve-month period form the operating cycle reported date. the long-term liabilities are those liabilities are those which would be paid over a long period of time like 5 years or 10 years.

Current liabilities include in general items alike accounts payables, taxes payable ad bills payables etc. non-current or long term liabilities include liabilities like Long term bonds, notes payable of duration more than 12 months. Log term loans etc(David Kieso,Jerry J. Weygandt and Terry D. Warfield, 2012, 15th edition).

While current liabilities are expected to be measured in terms of the liquidity of the entity under analysis the long-term liabilities would be analyzed under the solvency or leverage etc.

For example,current liabilities are used for assessment of a current ratio and quick ratio which makes an effective assessment of the short-term ability of the firm to meet payment obligation towards lenders, suppliers etc.

on the other hand, the long-term liabilities are used to assess the solvency position of the firm and often compared with total assets and total equity of the entity. The comparison with total assets is generally aimed at finding how leveraged the firm overall is or to find how much debt is used to finance the assets of the firm. With the increase in the overall use of the long-term liability the leverage would be higher and vice versa.

Thus, it is clear that both current and long term liabilities are sued for different purposes in the balance sheet and helps in making investing and financing decision decisions and used by both investors and the managers. So the classification is necessary for the management and the investors as well because current liability serves a different purpose of finding out the liquidity of the form and the long term liabilities are used find the solvency and leverage position of the firm. Thus, even if both are eventually required to be paid off they need to be reported separately for the convenience of making separate and different decisions (Deegan, 2014).  

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