Question

Operating Cycle and the period when payment is made is given below. How will you classify the liability ?

$\begin{array}{cccccccc}\text{Particulars}& \text{(i)}& \text{(ii)}& \text{(iii)}& \text{(iv)}& \text{(v)}& \text{(vi)}& \text{(vii)}\\ \text{Operating Cycle (Months)}& 9& 10& 10& 15& 15& 15& 16\\ \text{Expected period of payment of Trade}& \text{10}& \text{12}& \text{14}& \text{12}& \text{13}& \text{18}& \text{15}\\ \text{Payables(Months)}& & & & & & & \end{array}$

Answer 1

While classifying the liabilities into Current and Non-Current following two points should be taken into consideration :

1. All liabilities, of which the payment is expected to be made within 12 months from the date of Balance Sheet, shall be treated as Current. Period of operating cycle is irrelevant in such cases. Hence, trade payables in case of (i), (ii) and (iv) shall be treated as Current Liabilities.

2. Liabilities, of which the payment is expected to be made beyond 12 months from the date of Balance Sheet :

(i) If payment period is less than the period of operating cycle, the liability shall be treated as current liability. Hence, trade payables in case of (v) and (vii) shall be treated as Current Liabilities.

(ii) If payment period is more than the period of operating cycle, the liability shall be treated as non-current liability. Hence, trade payables in case of (iii) and (vi) shall be treated as Non-Current Liabilities.