Copyright

Why is it important to classify liabilities into short-term and long-term? Include examples of...

Question:

Why is it important to classify liabilities into short-term and long-term? Include examples of short and long-term liabilities in your response. Explain in detail.

Classification of Liabilities

Liabilities can be defined as a business entity obligations that are encountered in the course of business operations or business financial debts that are acquired legally. Liabilities are settled over a given period of time through the transfer of goods, money, or services.

Answer and Explanation:

Liabilities are broadly categorized into current liabilities which are also referred to short term liabilities and long term liabilities. Debts or obligations that are payable or due within one year are referred to as current liabilities. They include money bank overdrafts, money owed to suppliers, short term loans and interest payable. On the other hand, debts that are to mature or are to be paid in a period of more than a year can be termed as long term liabilities. They include loans on land, equipment, land, and mortgages, excluding payments to be made within the first year. Categorizing of liabilities plays a vital role in minimizing the accumulation of debt and interests as a result of late payments, as they provide an accurate view of withstanding debts which enable companies to pay off their liabilities as they become due.


Learn more about this topic:

Loading...
Current & Long-Term Liabilities: Definition & Characteristics

from Accounting 101: Financial Accounting

Chapter 10 / Lesson 1
9.9K

Related to this Question

Explore our homework questions and answers library