#63 Distinguish between Current/Short term Liabilities

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Question

#63 Distinguish between Current/Short term Liabilities and Non-current/Long term Liabilities.

Illustrate your answer with journal entries as examples.

Answer

Liabilities are something that a company or a person owes especially money, services, etc. They represent the obligations of a company or a person.

Liabilities can be Short term- Current liabilities or Long term liabilities. Short-term liabilities are known as Current liabilities while long term liabilities are known as Non-current liabilities. Short term liabilities/Current liabilities are liabilities that are obligations or services that are owned by a company in the near future. Usually, short term liabilities are liabilities that occur within the next 1 year. Few examples of short term liabilities are:-

1.) A company purchased inventory on credit, to be paid within 3 months:-

Particulars	Amount	Amount
Inventory A/c	XXX
To Accounts Payable A/c		XXX
(to record the purchase of inventory on credit)

2.) Salaries payable that are due for 2 weeks to its employees

Particulars	Amount	Amount
Salaries expense A/c	XXX
To Salaries Payable A/c		XXX
(To record the salaries payable)

Long term liabilities are liabilities that are non-current and long term in nature. These are generally the liabilities that are expected to be paid by the company on a long term basis. They are generally due after one year. Long term liabilities include Loans, mortgages, bonds payable, Debentures, pension obligations, etc. The obligations are not immediate and hence they are classified as Long term liabilities. Few examples of long term liabilities include:-

1.) ABC company issued Bonds payable for cash of $1 million.

Particulars	Amount	Amount
Cash A/c	XXX
To Bonds Payable A/c		XXX
(To record the bonds payable)

2.) DEF company borrowed a loan of $5 million to finance its purchase of a new machine

Particulars	Amount	Amount
Cash A/c	XXX
To Loan Payable A/c		XXX
(To record the proceeds from a loan and its related liabilities)