What is the difference between a current and long-term liability in final accounts preparation? (2024)

Current liabilities are obligations that you have to pay within one year or within your normal operating cycle, whichever is longer. Examples of current liabilities include accounts payable, short-term loans, accrued expenses, taxes payable, and dividends payable. Current liabilities are important for your cash flow management, as they indicate how much money you need to raise or generate in the short term to meet your obligations. Current liabilities also affect your current ratio, which is the ratio of your current assets to your current liabilities. A higher current ratio means you have more liquidity, or the ability to pay your debts as they become due.

Long-term liabilities are obligations that you have to pay after one year or beyond your normal operating cycle, whichever is longer. Examples of long-term liabilities include long-term loans, bonds payable, deferred taxes, pensions, and leases. Long-term liabilities are important for your capital structure, as they indicate how much debt you have taken on to finance your assets and operations. Long-term liabilities also affect your debt-to-equity ratio, which is the ratio of your total liabilities to your total equity. A higher debt-to-equity ratio means you have more leverage, or the use of borrowed funds to increase your returns.

The main difference between current and long-term liabilities is the time frame in which you have to pay them. Current liabilities are due within one year or within your normal operating cycle, while long-term liabilities are due after one year or beyond your normal operating cycle. This difference has implications for your balance sheet presentation, your liquidity and solvency analysis, and your interest expense calculation.

On your balance sheet, you have to separate your current and long-term liabilities into two categories. Current liabilities are listed first, followed by long-term liabilities. This helps you and your users to see how much of your liabilities are due in the short term and how much are due in the long term. It also helps you to calculate your working capital, which is the difference between your current assets and your current liabilities. A positive working capital means you have enough current assets to cover your current liabilities, while a negative working capital means you have a liquidity problem.

Another difference between current and long-term liabilities is how they affect your liquidity and solvency analysis. Liquidity is the ability to pay your debts as they become due, while solvency is the ability to pay your debts in the long term. Current liabilities are more relevant for your liquidity analysis, as they indicate how much cash you need to generate or raise in the short term to meet your obligations. Long-term liabilities are more relevant for your solvency analysis, as they indicate how much debt you have taken on and how it affects your equity and profitability. You can use various ratios to measure your liquidity and solvency, such as the current ratio, the quick ratio, the debt-to-equity ratio, and the interest coverage ratio.

The last difference between current and long-term liabilities is how they affect your interest expense calculation. Interest expense is the cost of borrowing money, and it is calculated based on the interest rate, the principal amount, and the time period of the loan. Current liabilities usually have higher interest rates than long-term liabilities, as they are more risky for the lenders. However, current liabilities also have shorter time periods than long-term liabilities, which means you pay less interest in total. Long-term liabilities usually have lower interest rates than current liabilities, as they are more secure for the lenders. However, long-term liabilities also have longer time periods than current liabilities, which means you pay more interest in total. Therefore, you have to consider both the interest rate and the time period when comparing the interest expense of current and long-term liabilities.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Corporate Accounting

+ Follow

Thanks for your feedback

Your feedback is private. Like or react to bring the conversation to your network.