Liabilities
Class 11 Accountancy — Accounting Terminology
Meaning and Types of Liabilities
Liabilities are amounts owed (payable) by the business.
Internal Liability
Liability towards the owners (proprietor or partners) of the business.
- •Capital / Owner's Equity
- •Capital contributed by proprietor/partners
- •Internal — owed to owners
External Liability
Liability towards outsiders — individuals or entities other than the owners.
- •Creditors, loans, borrowings
- •Creditors, bank overdrafts, long-term borrowings
- •External — arises from credit transactions or loans
Non-current Liabilities
Also known as Long-term Liability. A non-current liability is a liability that is payable after a period of more than 12 months from the end of the accounting period, which is the date of the Balance Sheet.
Example: A firm took a loan from a bank on October 1, 2022, to purchase machinery. The loan is payable in 5 yearly installments starting April 1, 2024. This is a non-current or long-term liability because it is payable after 12 months from the Balance Sheet date.
Current Liabilities
Also known as Short-term Liability. A current liability is a liability that is payable within 12 months from the end of the accounting period, which is the date of the Balance Sheet.
Example: A firm took a loan from a bank on September 1, 2022, and it is payable by August 31, 2023. This is a Current Liability because it is payable within 12 months from the Balance Sheet date.
Classification as per Schedule III, Companies Act 2013
| Aspect | Current Liabilities | Non-current Liabilities |
|---|---|---|
| Definition | Expected to be settled in the company's normal operating cycle | Liabilities that do not meet the criteria for current liabilities |
| Timeframe | Due within 12 months after the reporting date | Payable after 12 months from the Balance Sheet date |
| Trading purpose | Held primarily for being traded | Not held for trading |
| Right to defer | Company does NOT have unconditional right to defer settlement for ≥12 months | Company has right to defer settlement for ≥12 months |
Operating Cycle means the time between the acquisition of an asset for processing and its conversion into Cash and Cash Equivalents. If the operating cycle cannot be reliably identified, it is assumed to be a period of 12 months.