Accounting Primer: Non Current Liabilities

Non-current Liabilities

Non-current liabilities are those obligations that will be payable in the following year. There are three types of non-current liabilities, only two of which are listed on the balance sheet:

  • Non-current portion of Long-Term Debt (LTD)
  • Notes Payable to Officers, Shareholders, or Owners
  • Contingent Liabilities

Non-current portion of long-term debt is the principal portion of a term loan not payable in the coming year. Subordinated officer loans are treated as an item that lies between debt and equity. Contingent liabilities listed in the footnotes are potential liabilities, which hopefully never become due.

Non-current Liabilities Detailed

  1. Non-current Portion of Long-Term Debt (LTD): Non-Current portion of LTD is the portion of a term loan that is not due within the next 12 months. It is listed below the current liability section to demonstrate that the loan does not have to be fully liquidated in the coming year. LTD provides cash to be used for a long-term asset purchase, either permanent working capital or fixed assets.
  2. Notes Payable to Officers, Shareholder or Owners: Notes payable to officers, shareholders or owners represent cash that the shareholders or owners have put into the business. For tax reasons, owners may increase their equity investment beyond the initial business capitalization by making loans to the business rather than purchasing additional stock. Any return on investment to the owners can therefore be paid as tax-deductible interest expense rather than as non-tax-deductible dividends.
  3. When a business borrows from a financial institution, it is common for the officer loans to be subordinated or put on standby. The subordination agreement prohibits the officer from collecting his or her loan prior to the repayment of the institution’s loan. When on standby, the loan will be considered as equity by the financial institution. Notes receivable officer are considered a bad sign to lenders, while notes payable officer are considered to be reassuring.
  4. Contingent Liabilities: Contingent Liabilities are potential liabilities that are not listed on the balance sheet. They are listed in the footnotes because they may never become due and payable. Contingent liabilities include lawsuits, warranties and cross Guarantees.

If the business has been sued, but the litigation has not been initiated, there is no way of knowing whether or not the suit will result in a liability to the business. It will be listed in the footnotes because, while not a real liability, it does represent a potential liability which may impair the ability of the business to meet future obligations. Alternatively, if the business guarantees a loan made by a third party to an affiliate, the liability is contingent because it will never become due as long as the affiliate remains healthy and meets its obligations.

If you have any questions or would like to have a conversation about your business goals please feel free to give me a call. I routinely consult with small business owners on how to improve their profitability and revenue and would be glad to have a conversation at your convenience.

Lee Thurburn – 214-772-6854