Why do you separate current liabilities from long-term liabilities?

Current liabilities are separated from long-term liabilities on classified balance sheets. (You don’t have to prepare a classified balance sheet, but it is the norm. Classified balance sheets also separate the current assets from the long-term assets.)

Current liabilities are the obligations that are due within one year of the balance sheet’s date and will require cash payment or will need to be renewed. Knowing which liabilities will have to be paid within one year is important to lenders, financial analysts, owners, and executives of the company. (Current assets include cash and other assets that will turn to cash within one year.) Knowing the liabilities that are due within one year and the amount of assets turning to cash within one year are so important that it makes sense to prepare a classified balance sheet.

The amount of current liabilities is used in two of the most common financial ratios. Working capital is the amount of current assets minus the amount of current liabilities. The current ratio is computed by dividing the amount of current assets by the amount of current liabilities. You can see illustrations of these ratios in Financial Ratios.

Learn more about current liabilities and current assets at Balance Sheet.

About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.