Liabilities are one of the most important elements in a financial statement. They are divided into two types: current (short-term) and non-current (long-term). Classification occurs on a temporary basis.
Short-term liabilities are liabilities that require current resources for their liquidation. These include:
- payables ;
- dividends payable;
- short-term bills;
- announcements;
- accrued liabilities;
- tax payments;
- refundable deposits;
- conditional payment;
- unearned income prepaid;
- part of the long-term debt that must be paid in the current period;
- debt on demand.
So, current liabilities are repaid from current assets. These are resources that the organization could use for daily activities. Here is the main difference between current and long-term funds. Short-term resources have one more sign - they are converted into money or fully used for one balance period. Usually refers to the calendar year.
Short-term liabilities are classified on several grounds.
1) Obligations related to operations:
- debt on purchased raw materials, materials, goods;
- advances received;
- rent ;
- taxes;
- accrued salaries of staff and management.
2) Short-term obligations that will be repaid within 12 months from the date of reporting:
- debt on fixed assets;
- long-term liabilities payable within the next 12 months from the date of reporting.
3) Amounts that will be necessary to repay costs in the next 12 months from the time of the balance sheet:
- bonuses;
- compensation for holidays;
- other.
Short-term liabilities are conditional. They arise due to the fact that there are factors that contribute to the emergence of uncertainty regarding future profits (losses). An example is disaster risk. With such uncertainties, several degrees of probability are distinguished: 1) large; 2) opportunity; 3) small.
Consider several types of short-term liabilities.
1) Accounts payable - accounts for a particular product or service that are acquired for the economic activity of an enterprise. The maturity of such an obligation is usually specified in the contract.
2) Short-term bills are essentially similar to payables. The main difference is that they are used to pay for services and goods that may not be purchased for the main activities of the company.
3) Part of the long-term debt that should be covered in this reporting period. This amount is included in current liabilities and deducted from non-current debt.
4) Transfers that the company makes at the request of the lender. These payments are also recorded as current liabilities in the balance sheet.
5) Accrued payments include: staff salary, interest on loans.
6) Advances and deposits that are refundable. Such payments have become a popular form of relations between market entities. For example, a company requests an advance, which, if a partner refuses a transaction, can serve as a good source for covering losses, penalties, etc.
7) Prepaid income arises in situations when funds are received by the company before the service or delivery of goods is completed. For example, the sale of airline tickets.
8) Taxes - withholding funds in favor of local or central authorities.
9) Debt arising from non-payment of leave to employees. This situation arises if employees do not use vacation days during the reporting year.
10) Payment of dividends to holders of shares and bonds is mandatory to be paid after summing up and submitting annual reports.
Short-term obligations of the enterprise must be paid in a timely manner. Otherwise, fines and penalties may be added to the payment amount.