What is the difference between current and long-term liabilities under GAAP?

What is the difference between current and long-term liabilities under GAAP?

• A. Current liabilities are less than $10,000
• B. Current liabilities are due within one year
• C. Long-term liabilities can be paid off anytime
• D. Long-term liabilities represent future income obligations

Answer: (B)

The distinction between current and long-term liabilities is centered on the time frame in which these obligations are expected to be settled. Current liabilities are defined as obligations that a company is expected to pay within one year or within the normal operating cycle, whichever is longer. This could include accounts payable, short-term loans, and accrued expenses, which must be settled in the near term, reflecting the company’s short-term financial obligations. On the other hand, long-term liabilities are obligations that extend beyond one year and may include items such as bonds payable, long-term loans, and lease obligations that are due in future periods. These liabilities typically encompass financial commitments that a business has to manage over a longer duration, allowing for planning and potentially more stable financial management. In the context of the other options, defining current liabilities strictly by a dollar value limit or suggesting that long-term liabilities can be paid off at any time does not align with how these categories are structured under GAAP. Additionally, characterizing long-term liabilities as income obligations misrepresents their nature; they are commitments to pay debts rather than anticipated future income. Thus, the definition that current liabilities are due within one year represents the core framework for distinguishing between current and long-term liabilities under GAAP.

The distinction between current and long-term liabilities is centered on the time frame in which these obligations are expected to be settled. Current liabilities are defined as obligations that a company is expected to pay within one year or within the normal operating cycle, whichever is longer. This could include accounts payable, short-term loans, and accrued expenses, which must be settled in the near term, reflecting the company’s short-term financial obligations.

On the other hand, long-term liabilities are obligations that extend beyond one year and may include items such as bonds payable, long-term loans, and lease obligations that are due in future periods. These liabilities typically encompass financial commitments that a business has to manage over a longer duration, allowing for planning and potentially more stable financial management.

In the context of the other options, defining current liabilities strictly by a dollar value limit or suggesting that long-term liabilities can be paid off at any time does not align with how these categories are structured under GAAP. Additionally, characterizing long-term liabilities as income obligations misrepresents their nature; they are commitments to pay debts rather than anticipated future income. Thus, the definition that current liabilities are due within one year represents the core framework for distinguishing between current and long-term liabilities under GAAP.