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  Classifying Claims

Introduction to Classifying Claims

As we have previously described that the claims are generally categorized into

1. Equity (owner's claim) and

2. Liabilities (claims of outsiders).

Further the liabilities are classified as either current or non-current.

CURRENT LIABILITIES

Current liabilities are mainly amounts unpaid for settlement in the short term. To be more exact, they are liabilities that congregate any of the following conditions:

  • They are supposed to be settled within the normal operating cycle of business;
  • They are held mainly for trading purposes;
  • They are because be settled in a year after the date of the relevant statement of financial position;
  • There is no right to postpone settlement across a year after the date of the relevant statement of financial position.

NON-CURRENT LIABILITIES

Non-current liabilities demonstrate amounts unpaid which do not meet the definition of current liabilities and so stand for longer-term liabilities.

Note:  it is relatively common for non-current liabilities to turn into current liabilities. For instance, borrowings that are because of be repaid in eighteen months following the date of a specific statement of financial position will come out like a non-current liability, but if the borrowings have not been paid off in the meantime, they will come out like a current liability in the statement of financial position as at one year later.

This categorization of liabilities can assist gain a clearer impact of the ability of the business to meet its maturing obligations (i.e. claims that are have to be met shortly). The value of the current liabilities (i.e. the amounts which must be paid in the normal operating cycle), can be compared along with the value of the current assets (i.e. The assets that either are cash or will turn into cash in the normal operating cycle).

The categorization of liabilities should also assist to emphasize how the long-term finance of the business is increased. If a business depends on long-term borrowings to finance the business, the financial risks related with the business will raise. This is since these borrowings will carry a commitment to create periodic interest payments and capital repayments. The business might be forced to end the trading if this commitment is not fulfilled. So, while increasing long-term finance, a business has to be tried to hit the right balance among non-current liabilities and equity of owner.

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