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Why do you separate current liabilities from long-term liabilities?

Author:
Harold Averkamp, CPA, MBA

Definition of Current Liabilities and Long-term Liabilities

Generally, current liabilities are a company’s obligations that are due within one year of the balance sheet’s date and will require a cash payment or will need to be renewed.

Long-term (or noncurrent) liabilities are the obligations that are not due within one year of the balance sheet date and will not require a cash payment.

Typically, companies issue classified balance sheets. This means that the current assets and current liabilities are listed in separate sections of the balance sheet. The classified balance sheets allow the users of this financial statement to quickly determine the amount of the company’s working capital and current ratio. Both of these metrics are useful in determining a company’s ability to meet its current or short-term obligations.

Examples of Current Liabilities and Long-term Liabilities

Often a company’s current assets include cash, accounts receivable, and inventories. It’s current liabilities typically include accounts payable, loan payments due within one year of the balance sheet date, and wages payable. Long-term liabilities may include loan principal payments not due within one year of the balance sheet date.

For example, a mortgage loan on a company’s building will likely have 12 monthly payments due within one year of the balance sheet date and perhaps an additional 60 monthly payments due after the balance sheet date. The principal portion of those monthly payments (not the interest portion since the interest is not yet a liability) is reported on the balance sheet. It is possible that a mortgage principal balance of $150,000 will mean a current liability of $15,000 and a long-term liability of $135,000.

Assume that the total amount of company’s current assets is $120,000, and the total amount of its current liabilities is $100,000. This means the company’s working capital is $20,000 and its current ratio is 1.2 ($120,000 / $100,000). Being able to quickly see that the company has only $20,000 in working capital is important information for the company, its investors, and its creditors.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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