January 26, 2022

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Six Differences between Current Liabilities and noncurrent Liabilities.

Six Differences between Current Liabilities and noncurrent Liabilities.
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Let now focus on the comparison between current liabilities and non-current liabilities. As in earlier contents, a detail explanation of the above terms have been given. These differences will be base on certain items.

Differences between current and noncurrent Liabilities

Reporting Period: Current liabilities are paid within one reporting year. While the other is for more than one year.

Economic Obligations. Both are economic obligations. However, the impact is different. Noncurrent liabilities have more impact on business economic resources than current liabilities. Failure to pay long term debt might led to liquidation or bankruptcy.

Cash flow. Also, the amount of cash flow for current liabilities is small compared to that of noncurrent obligations.

Liquidity and solvency. A company that cannot meet up current liabilities payment faces liquidity issue. However, a business that cannot pay noncurrent liabilities faces a solvency issue. In addition, such a company may become insolvent in no time and the creditors and debt holder may file for bankruptcy or compulsory liquidation. This may end the company.

Ratios. Ratios used to measure current liabilities are current ratio, quick ratio and cash ratio. While that of noncurrent liabilities are Gearing/Leverage ratio, debt to equity ratio, debt to assets ratio and coverage ratio.

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Examples. Examples of current liabilities include account payable, accrued expenses, prepaid income. That of noncurrent liabilities include long term debt, secured and unsecured bond, provisions, deferred revenue.

Conclusion

Both liabilities differ in a number of ways. In a financial position statement, the liabilities are separated to allow users to have a better understanding.

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