Financial Accounting for Decision Makers

CLASSIFYING CLAIMS
As we have already seen, claims are normally classified into equity (owner’s claim) and liabili-
ties (claims of outsiders). Liabilities are further classified as either current or non-current.
Current liabilities
Current liabilities
are basically amounts due for settlement in the short term. To be more 
precise, they are liabilities that meet any of the following conditions:
■ 
they are expected to be settled within the business’s normal operating cycle;
■ 
they arise principally as a result of trading;
■ 
they are due to be settled within a year after the date of the relevant statement of financial 
position; and
■ 
there is no right to defer settlement beyond a year after the date of the relevant statement 
of financial position.
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CHAPTER 2
MEASURING AND REPORTING FINANCIAL POSITION
It is quite common for non-current liabilities to become current liabilities. For example, 
borrowings to be repaid 18 months after the date of a particular statement of financial posi-
tion will normally appear as a non-current liability. Those same borrowings will, however, 
appear as a current liability in the statement of financial position as at the end of the following 
year, by which time they would be due for repayment after six months.
This classification of liabilities between current and non-current helps to highlight those 
financial obligations that must shortly be met. It may be useful to compare the amount of 
current liabilities with the amount of current assets (that is, the assets that either are cash or 
will turn into cash within the normal operating cycle). This should reveal whether the business 
can cover its maturing obligations.
The classification of liabilities between current and non-current also helps to highlight the 
proportion of total long-term finance that is raised through borrowings rather than equity. 
Where a business relies on borrowings, rather than relying solely on funds provided by the 
owner(s), the financial risks increase. This is because borrowing brings a commitment to 
make periodic interest payments and capital repayments. The business may be forced to 
stop trading if this commitment cannot be fulfilled. Thus, when raising finance, a reasonable 
balance must be struck between borrowings and owners’ equity. We shall consider this issue 
in more detail in Chapter 8.