1.
Why are liabilities classified on a balance sheet as current and noncurrent? Who wants to know?
What is the benefit of knowing this information?
Solution
The main reason of classification of liabilities into Current and Non- current liabilities is the
difference with regard to their respective payment periods. Current Liabilities are those liabilities
whose balances need to be cleared or paid within a period of 1 year whereas Non-current
liabilities are those balances which get due for payment after 1 year. Usually short term debt and
balances for normal purchases come under current liabilities whereas non- current liabilities
usually figure long term debt.
It is usually the lenders who are interested in knowing these details. Short term lender would
usually be interested in knowing the current liability as this help them assess the liquidity
situation of the company. In other words, it indicates whether or not, company would be able to
meet its short term expenses with its resources.
Long term vendors especially banks, venture capitalists & PE firms are usually interested in
knowing the non- current liabilities because it helps them understand how much long term debt
the company owes and whether the company would be able to repay additional debt with the
resources it has at its disposal.