Whenever we look at the balance sheet of a business, we also see liabilities on one side, this is because the business first has liabilities and then through them, assets come. For example, if a business takes a loan, the loan becomes a liability of the business and the money received through it becomes an asset. Liabilities include loans, debentures, capital, creditors, outstanding expenses, etc.
For better understanding and management, liabilities are classified as short-term liabilities and long-term liabilities, etc. This classification helps to differentiate between liabilities according to nature. We can also see the classification of liabilities in the balance sheet. Note that liabilities include only those liabilities that have not been paid yet, if any liability has been paid then it will not be called a liability. Liabilities are not just those of the business, they include everyone who is financially responsible for something.
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Classification of Liabilities
The classification of liabilities is described below:
| Long Term Liabilities (Non-current Liabilities) | Short Term Liabilities (Current Liabilities) |
1. Long Term Liabilities:
Long-term liabilities mean those liabilities which are due in more than one year or which are paid in more than one year. These liabilities are also known as non-current liabilities. These are shown on the liabilities side of the balance sheet and include debentures, long-term debt, equity, capital, etc. These play a very important role in business because investment in business is mostly done through them. If short-term liabilities are subtracted from all liabilities, long-term liabilities are left.
| Long Term Liabilities = Liabilities – Short Term Liabilities |
Example of long-term liabilities:
- Capital
- Long Term Loan
- Long Term Borrowings
- Debentures
- Shares
2. Short Term Liabilities:
Short-term liabilities are those liabilities that are due within a year, or which are paid within a year. Short-term liabilities are also known as current liabilities. These are shown on the liabilities side of the balance sheet and include creditors, short-term loans, outstanding expenses, etc. These liabilities help in running the business as these liabilities are created when transactions of goods, services, etc. are made. If long-term liabilities are subtracted from all liabilities, short-term liabilities are left.
| Short Term Liabilities = Liabilities – Long Term Liabilities |
Example of short-term liabilities:
| Creditors | – All Accounts payable |
| Short Term Loans | – Loan From Bank – Loan From NBFC – Other Loan |
| Short Term Borrowings | – All Short Term Borrowings |
| Outstanding Expenses | – Bill/Subscription Payable – Salay/Wages payable – Interest Payable – Rent Payable – Other Payables |
| Taxes | – Income Tax – GST Tax – Other Tax |
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QNA/FAQ
Q1. Liabilities are classified into how many parts?
Ans: Liabilities are mainly classified into two parts: long-term liabilities and short-term liabilities.
Q2. Write examples of short-term liabilities.
Ans: The following are examples of short-term liabilities:
1. Creditors
2. Short Term Loans
3. Short Term Borrowings
4. Outstanding Expenses
5. Tax
Q3. By what name are current liabilities also known?
Ans: Current liabilities are also known as short-term liabilities.
Q4. Write examples of long-term liabilities.
Ans: The following are examples of long-term liabilities:
1. Capital
2. Long Term Loan
3. Long Term Borrowings
4. Debentures
5. Shares
Q5. What are long term liabilities also known as?
Ans: Long-term liabilities are also known as non-current liabilities.
Q6. Short Term Liabilities = Liabilities – Long Term Liabilities, is this true?
Ans: Yes
Q7. Long Term Liabilities = Liabilities – Short Term Liabilities, is this wrong?
Ans: No
