Liabilities and why it is important to distinguish between long term and current liabilities
Liabilities and why it is important to distinguish between long term and current liabilities
As we approach the time of year when we are finalising AFS for clients we are often asked to differentiate between the 2 types of liabilities seen on the face of your balance sheet. These are disclosed as either current or non-current liabilities.
In essence, current liabilities are those liabilities which are due and payable within the next 12 months. And you guessed it… long terms liabilities are then those that are due and payable after the 12 month period.
Other than the requirement that these are separately disclosed on your AFS, knowing how they are classified allows you to better plan for their repayment.
Knowing what cash is required to settle your short term (or current) debt is key in knowing what cash flow you require over the next few months. Having a clear cash flow view helps you to better plan for the immediate future and ensure that your debtors collection plan matches that required to pay your debts as they become due.
Management of your full working capital cycle requires accurate recording of liabilities (as well as their correct classification).
Yours in simplifying finance,
