Every organization performs various business activities during the operating cycle. Selling and purchasing activities take place within a certain period and result in several outcomes, such as inventory, sales revenue, and cash collection. However, each entity has assets and liabilities during the operating cycle. It owns assets such as equipment and machinery and faces obligations that it must pay during the operating or long term period.
These obligations are divided into current and non-current liabilities. Any accountant can determine how to calculate and record them in the books and financial statements of the organization correctly. This constitutes a significant part of their ability to assist the organization in managing its business effectively. Therefore, accountants must pay attention to tracking and recording the assets and obligations of the organization accurately and regularly, ensuring that they are correctly represented in the financial accounts of the organization.
The main objective of the assets of an organization is to provide the necessary support for production and revenue operations. These assets include equipment, machinery, inventory, and other fixed assets. The objective of current liabilities is to finance purchasing, procurement, services, and sales operations.
These liabilities include trade debts, accounts payable, rent, and other short-term obligations. On the other hand, non-current liabilities represent long-term obligations such as bank loans, bonds, long-term lease commitments, and other obligations.

As we have previously discussed current and fixed assets in previous articles, today we will be discussing current and fixed liabilities in this article.

Article contents:
– What are current liabilities?
– Types of current liabilities
– Standards for determining current liabilities
– The benefit of current liabilities
– What are non-current or fixed liabilities?
– Types of non-current liabilities
– The relationship between current and long-term liabilities

What are current liabilities?
Current liabilities refer to financial obligations that an organization must pay within a period of not more than one year, and they are part of the financing of the organization’s daily business operations. The organization must have sufficient financial liquidity to pay these obligations, and current assets can be used to cover them. Current liabilities are recorded on the credit side of the financial statements of the organization and are an indicator of the organization’s ability to bear risks and manage daily and future cash flows.
Financial liquidity must be available to ensure the ability to pay these short-term obligations, thereby reducing the financial risks of the organization and increasing the confidence of other financial parties in it. Current liabilities are part of the operating cycle of the organization and include trade obligations, accounts payable, rent, and debts due within a year, representing the money that the organization must pay in the near future.
Knowing the size and composition of current liabilities is important for accountants and financial managers to determine the organization’s ability to meet its financial obligations and plan for appropriate financing to meet its financial needs in the near future.

Types of Current Liabilities

The elements of current liabilities in organizations are diverse and include several types, including:

– Accounts payable: Short-term financial obligations to suppliers and vendors, including amounts due for invoices, fees, taxes, wages, and any other financial obligations, where the customer is allowed a certain period of time for payment, ranging from 15 to 45 days.
– Short-term debts: Includes the total payments due during the year, and the financial liquidity of the organization is determined by comparing the amount of short-term debts with long-term debts.
– Commercial papers: Short-term financial obligations resulting from business operations carried out by the organization, such as commercial bonds and bills.
– Short-term bank loans: Includes loans used to increase the organization’s capital.
– Overdrafts: The money that the organization must pay to the bank when it withdraws from an account that does not have sufficient balance.
– Accrued profits: The profits of the shares that are announced by the board of directors at the end of the fiscal period and have not yet been distributed to the shareholders, making them recorded as a financial obligation on the organization until payment is made.
– Taxes due during the year: Includes several types of taxes that organizations must pay and are recorded as short-term liabilities, such as income taxes, payroll taxes, and sales taxes.
– Accrued expenses: Includes costs and expenses recorded in the accounting books that have not yet been paid and are considered short-term financial obligations that are paid throughcurrent assets such as cash. Examples of accrued expenses include interest payments on outstanding loans, unpaid service or product warranties, property and real estate taxes due for the current period, employee salaries, bonuses, and accrued currency.
– Salary obligations: Includes payroll expenses due to the organization during the year, including payments held for employees, health insurance premiums, and other financial obligations.
In conclusion, current liabilities are an essential part of the short-term financial obligations of the organization and have a significant impact on the organization’s financial liquidity, ability to finance its activities, and bear its financial obligations. Therefore, organizations should carefully manage and plan these liabilities, ensure their ability to pay them on time, and improve financial liquidity management to avoid any financial problems they may face in the future.

 Standards for determining current liabilities

There are several criteria used to determine current liabilities in the financial statements of organizations. Current liabilities are considered when one of the following conditions is met:

– The financial obligation is paid within the operating cycle of the organization.
– The financial settlements for the financial obligations do not exceed one year.
– The obligation is not held for investment purposes.
– The financial obligation is due to be paid within 12 months.

By using these criteria, organizations can determine their current liabilities and include them in their financial statements.

Benefits of Current Liabilities:

Current liabilities provide an important benefit in measuring the short-term liquidity of organizations. These benefits include:

– Measuring the current ratio of liquidity: Current liabilities are used to measure the current ratio of liquidity, which reflects the organization’s ability to pay its short-term obligations. This ratio is calculated by dividing the total current assets by current liabilities.
– Measuring the quick ratio of liquidity: Current liabilities are used to calculate the quick ratio of liquidity, which reflects the organization’s actual ability to convert its current assets into cash immediately. This ratio is calculated by dividing the current assets minus inventory by current liabilities.
– Measuring the cash ratio: Current liabilities help calculate the cash ratio, which reflects the organization’s actual ability to pay its short-term obligations using cash or its equivalent. This ratio is calculated by dividing cash and its equivalent by current liabilities.

Typically, if any of these ratios are higher than the acceptable level, it is evidence ofhigh liquidity for the organization and its ability to pay its short-term obligations. Therefore, current liabilities can be used as an indicator of the short-term liquidity of the organization and its ability to bear financial risks and manage its liquidity effectively.

What are non-current liabilities or long-term liabilities?

Non-current liabilities are the payable obligations that are paid within a period of more than one year and are also called long-term liabilities. These obligations include long-term loans, bonds, lease obligations, installment obligations, and others. Non-current liabilities are an important part of long-term financing for organizations.
Organizations aim to obtain long-term debt to finance many activities, such as purchasing fixed capital assets, expanding their business, financing large projects, and providing the necessary capital for daily business operations. Non-current liabilities are also a means of controlling cash flows and maintaining the financial stability of the organization, as these debts are paid over the long term, which helps to provide the time and resources needed to manage them effectively and achieve the organization’s goals.

Types of Non-Current Liabilities:

There are several types of non-current or long-term liabilities, including:
1. Long-term bonds
2. Long-term loans
3. Deferred tax liabilities
4. Mortgage payable
5. Accrued compensation
6. Pension liabilities
7. Deferred revenue

These liabilities are obligations that organizations must pay within a period of more than one year and contribute to the long-term financing of organizations and provide the necessary capital for expansion, growth, and daily business operations. Organizations can use these long-term liabilities to finance large projects, purchase fixed capital assets, and finance daily business operations. It is important that organizations manage these liabilities wisely and effectively and control their cash flows well toensure business sustainability.
Relationship between Current and Non-Current Liabilities:
The relationship between current and non-current liabilities is that they both form part of the total liabilities of the organization. Current liabilities are obligations that must be paid within a period of more than one year, while non-current liabilities are obligations that are paid over a period of more than one year and are part of the long-term financing of the organization.
Therefore, the actual total obligations of the organization are determined by placing both current and non-current liabilities in the famous equation for total liabilities, which is as follows:
Total Liabilities = Current Liabilities + Non-Current Liabilities
Accountants and auditors must be familiar with this equation before preparing the financial statements of the organization, as current and non-current liabilities appear on the liability side of the balance sheet. Therefore, current and non-current liabilities have a direct relationship with each other, where an increase in either of them affects the total liabilities and increases the obligations of the organization.

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