Question

Which of the following is a non-current liability ?

• A. Mortgage Loan
• B. Bank Overdraft
• C. Outstanding Salary
• D. Prepaid Expenses

Hint:

To classify a liability, ask the question: "Does this have to be paid back within one year?" If the answer is no, it's non-current. If yes, it's current. Be careful with items like 'Prepaid Expenses,' which are assets, not liabilities.

Answer 1

The Correct Option is A

Step 1: Understanding the Question:
The question asks to identify the non-current liability from the given list of balance sheet items.
Step 2: Key Concept:
Liabilities are classified based on their settlement period:

Current Liabilities: Obligations that are expected to be settled within the company's normal operating cycle or within 12 months from the reporting date, whichever is longer.

Non-Current Liabilities (or Long-Term Liabilities): Obligations that are not due for settlement within 12 months.

Step 3: Detailed Explanation:
Let's classify each item:

(A) Mortgage Loan: This is a loan secured by real estate (property). Such loans are typically taken for a long period (several years) and are therefore a classic example of a non-current liability.

(B) Bank Overdraft: This is a short-term borrowing facility provided by a bank, allowing a company to withdraw more money than it has in its account. It is repayable on demand or within a short period, making it a current liability.

(C) Outstanding Salary: This represents salaries earned by employees but not yet paid at the balance sheet date. These are typically paid in the next month and are thus a current liability.

(D) Prepaid Expenses: This is an expense paid in advance. It represents a future benefit to the company (e.g., prepaid insurance). It is classified as a current asset, not a liability.

Step 4: Final Answer:
Among the given options, only a Mortgage Loan is a long-term obligation, making it a non-current liability. Therefore, (A) is the correct answer.