Last update 23/11/2019
Current and non-current liabilities explains the liabilities as in the Conceptual Framework 2018: this is the definition: A liability is a present obligation of the entity to transfer an economic resource as a result of past events.
A liability is defined as a company’s legal financial debts or obligations that arise during the course of business operations. Liabilities are settled over time through the transfer of economic benefits including money, goods or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues and accrued expenses.
Liabilities are a vital aspect of a company because they are used to finance operations and pay for large expansions. They can also make transactions between businesses more efficient. For example, in most cases, if a wine supplier sells a case of wine to a restaurant, it does not demand payment when it delivers the goods. 
Rather, it invoices the restaurant for the purchase to streamline the drop-off and make paying easier for the restaurant. The outstanding money that the restaurant owes to its wine supplier is considered a liability. In contrast, the wine supplier considers the money it is owed to be an asset.
For a liability to be accounted for in the financial statements of the reporting entity, these three criteria from the definition must all be satisfied:
- the reporting entity has an obligation,
- the obligation is to transfer an economic resource, and
- the obligation is a present obligation that exists as a result of past events.
In IAS 1 Presentation of Financial Statements the classification of liabilities is further explained and defined. In IAS 32 Financial instruments: Presentation the classification of financial instruments into assets, liabilities and equity instruments is regulated.
Key points
- Non-current liabilities, also known as long-term liabilities, are obligations listed on the balance sheet not due for more than a year.
- Various ratios using noncurrent liabilities are used to assess a company’s leverage, such as debt-to-assets and debt-to-capital.
- Examples of non-current liabilities include long-term loans and lease obligations, bonds payable and deferred revenue.
Examples of liability accounts in the statement of financial position are:
- Note payable,
- Accounts payable / Trade creditors / Trade payables,
- Salaries payable, Wages payable, Current and non-current liabilities
- Social securities payable Current and non-current liabilities
- Interest payable, Current and non-current liabilities
- Accrued expenses (payable)
- (Corporate) Income taxes payable,
- Customer deposits, Current and non-current liabilities
- Warranty liability,
- Lawsuit payable / claims payable,
- Deferred income, Unearned revenues,
- Bonds payable.
Contra liabilities are liability accounts with debit balances. (A debit balance in a liability account is contrary—or contra—to a liability account’s usual credit balance.) Examples of contra liability accounts include:
- Discount on Notes Payable Current and non-current liabilities
- Discount on Bonds Payable Current and non-current liabilities
- Debt Issue Costs Current and non-current liabilities
- Bond Issue Costs Current and non-current liabilities
Classifications Of Liabilities On The Balance Sheet
Liability and contra liability accounts are usually classified (put into distinct groupings, categories, or classifications) on the balance sheet. The liability classifications and their order of appearance on the balance sheet are:
- Current Liabilities – payable within 12 months after the applicable reporting date,
- Long Term Liabilities – payable later then 12 months after the applicable reporting date.
Solvency ratio
The solvency ratio is a key metric used to measure an enterprise’s ability to meet its debt obligations and is used often by prospective business lenders. The solvency ratio indicates whether a company’s cash flow is sufficient to meet its short-and long-term liabilities. The lower a company’s solvency ratio, the greater the probability that it will default on its debt obligations.
The Formula for the Solvency Ratio Is:
Solvency ratio = (After Tax Net Profit + Depreciation + Amortisation) / Total liabilities
Different forms of solvency ratios
Generally, there are six key financial ratios used to measure the solvency of a company. These include:
Current ratio
Computed as Current Assets ÷ Current liabilities, this ratio helps in comparing current assets to current liabilities and is commonly used as a quantification of short-term solvency.
Quick ratio
Also known as ‘liquid ratio’ and computed as Cash + Accounts Receivable ÷ Current liabilities, considers only the liquid forms of current assets thus revealing the company’s reliability on inventory and other current assets to settle short-term debts.
Current debts to inventory ratio
Computed as Current liabilities ÷ Inventory, this ratio reveals the reliability of a company on available inventory for the repayment of debts
Current debts to net worth ratio
Computed as Current liabilities ÷ Net worth, this ratio indicates the amount due to creditors within a year’s time as a percentage of the shareholders investment
See also: The IFRS Foundation