Non-Current Liabilities
FAC1502 - Financial Accounting Principles, Concepts, and Procedures · ACCOUNTABILITY FOR CURRENT AND NON-CURRENT LIABILITIES
Non-Current Liabilities
A non-current liability is a financial obligation that is due for payment after a period of more than one year. These liabilities are typically secured by collateral, such as property or other assets. Common examples include long-term loans, mortgages, and debentures. Understanding how to record and disclose non-current liabilities is essential for accurate financial reporting.
Recording Non-Current Liabilities
When a business takes on a non-current liability, it must record the transaction in its books. This involves making appropriate entries in the general ledger. Let’s explore how to record a long-term loan and the related mortgage.
Example: Long-Term Loan
Suppose Eco buys a property for R114 000 through a first mortgage from ABC Bank at an interest rate of 17% per annum. The loan will be repaid in four equal instalments every five years, with the first payment due on 1 January 20.6. Here are the entries for Eco:
Dr Land Cr
20.1 R
Jan 1 Mortgage: ABC Bank J 114 000
Dr Mortgage: ABC Bank Cr
20.1 R
Jan 1 Land 114 000In this case, the "Land" account is debited to reflect the asset acquired, while the "Mortgage" account is credited to indicate the liability incurred.
Remember: Non-current liabilities must be recorded at their present value, which often requires discounting future payments to their value today.
Disclosure in Financial Statements
Non-current liabilities must be disclosed in the statement of financial position (balance sheet). This disclosure provides stakeholders with insight into the company’s long-term financial obligations.
Example: Statement of Financial Position
Continuing with Eco's example, the liability portion of the statement of financial position would look like this:
| Liabilities | Amount (R) |
|---|---|
| Non-Current Liabilities | 114 000 |
This shows the total amount of non-current liabilities, which helps users of the financial statements assess the company's long-term financial health.
Common Types of Non-Current Liabilities
1. Long-Term Loans: Loans that are repaid over a period longer than one year.
2. Mortgages: Loans secured by real property, typically requiring periodic payments.
3. Debentures: A type of debt instrument that is not backed by physical assets or collateral.
Correcting Errors in Non-Current Liabilities
Errors can occur when recording transactions related to non-current liabilities. These errors must be corrected to ensure the accuracy of financial statements.
Example: Error Corrections
Consider the following scenario:
- An invoice for R1 787 was recorded as R1 878.
- A credit note of R60 was posted to the wrong account.
- A cheque for R90 was incorrectly entered on the wrong account.
To correct these errors, you would adjust the respective accounts in the general ledger. Each correction must reflect the accurate amounts to ensure that both the trade payables control account and the individual creditor accounts align.
Watch out: Always double-check your entries to avoid discrepancies between the control accounts and individual creditor accounts.
Summary
- A non-current liability is due after one year.
- Record non-current liabilities accurately in the general ledger.
- Disclose non-current liabilities in the statement of financial position.
- Correct errors promptly to maintain accurate financial records.
Check your understanding
- What are non-current liabilities and why are they important?
- How should a long-term loan be recorded in the general ledger?
- What information should be disclosed in the financial statements regarding non-current liabilities?
- How can errors in the recording of non-current liabilities be corrected?