Classification of Liabilities
Current liabilities are:
- Expected to be satisfied within one year or the normal operating cycle, whichever is longer.
- Paid out of current assets or with cash generated from operations.
Long-term liabilities are:
- Due beyond one year or beyond the normal operating cycle.
- Used to finance long-term assets.
It is important to distinguish between current and long-term liabilities because of the effect on liquidity.