Accounting - Classification of terms for the balance sheet
Classification of terms for the balance sheet
Classification of items into current and non-current sections helps
assess liquidity. There are three criteria for separating current from
* Time - How long before the asset is expected to be converted into cash?
* Intention - Is it intended to convert the asset into cash in the near future?
* Economic benefit - For how long will the asset continue to earn revenue for the business?
Time is also a criterion for separating current and non-current
liabilities. When classifying liabilities it is important to check the date
when a liability falls due. What may be a non-current liability in this
period may become a current liability in the next period. Liabilities such
as loans and mortgages may be in the form of instalment payments. This
means that they have a current and non-current component. For instance, if
you borrowed £ 20,000 over five years then initially you would have
£ 4,000 of loan as a current liability and £ 16,000 as non-current
liability. At the end of the year with £ 4,000 repaid you would show in
the balance sheet £ 4000 as a current liability and £ 12,000 as non
current, both under the title of 'loan'.
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