When you read the balance sheet (Also see Accounting – Preparation of Balance Sheet) of your company, you will see that this financial statement is divided into three different sections, which are the assets, liabilities and shareholder’s equity. The term “liability” refers to the amount of money that the company owes to another party. The party can be an individual, institution or a company. This is because when business owners (Also see Tricks From Millionaire Business Owners) run a business, they may borrow an amount of money from financial institutions or others or make purchases on credit. Hence, they have an obligation to pay for them in a specific timeframe.
According to the timeframe that business owners should settle the payments, the accountants from an bookkeeping firm in Johor Bahru will divide the liabilities into non-current liabilities and current liabilities. The former is the type of liabilities (Also see Liabilities and Equity) that the company needs to pay for one year and above. As against, the latter refers to those that the company should settle within a year. In today’s article, we will focus on the non-current liabilities.
The funds that the company has borrowed play a crucial role in the business operation because the shareholder’s capital cannot be the only source of funds for the business capital. Hence, most companies would take loans from financial institutions or from any individuals, and those that are payable after a year fall under the category of non-current liabilities. Business owners may obtain long-term borrowings from financial institutions, or by using debentures or bonds.
If a company chooses to borrow some funds from the financial institutions or banks, it needs to pay the liability and the associated interests within a predetermined timeframe. If it fails to do so, the institution may impose a penalty fee on it. Hence, a substantial borrowing amount is not a good sign for the financials of the company.
Besides, business owners (Also see 3 Common Accounting Mistakes that Most Business Owners Make) can choose to use debentures or bonds that bear a fixed amount of interest to borrow funds from the market. They need to pay the funds back to the bondholders along with the amount of predetermined interests. Bondholders are not concerned about the company’s profitability. The company has to obligation to pay them until it is declared to be insolvent.
Non-current liability is an important section in the company’s balance sheet as it is a measure of the company’s integrity. If the ratio of debt is higher than that of the equity, business owners and all the related parties should pay more attention to the efficiency of business operations that the company has carried out. If such a condition appears in your business, you need to control the non-current liabilities as soon as possible.