Enforcement Officer / Accounts Officer (EO/AO) 2020 recruitment test, advertisement 421. Transcribed from the Commission's own booklet (series A, NMJX-U-GTA); answer as per the official UPSC final answer key. This question is in Part B. Answer last reviewed 24 August 2026.

When are current liabilities payable ?

(a)Within a year
(b)After one year but within five years
(c)Within five years
(d)Subject to a contingency

Answer

Why

Correct — A, (a) Within a year. A liability is classified as current when it has to be discharged in the short run, and the short run in accounting is one year — more precisely twelve months from the reporting date, or the length of the entity's normal operating cycle if that is longer. Schedule III to the Companies Act, 2013 puts it in four limbs: a liability is current if it is expected to be settled in the company's normal operating cycle; if it is held primarily for the purpose of being traded; if it is due to be settled within twelve months after the reporting date; or if the company does not have an unconditional right to defer its settlement for at least twelve months after the reporting date. Everything that fails all four limbs is non-current. The familiar members of the class follow directly: trade payables and bills payable, outstanding expenses such as wages and rent due but unpaid, short-term borrowings and bank overdraft, provision for taxation, unclaimed dividends, statutory dues such as provident fund contributions payable, and the instalments of a long-term loan that happen to fall due inside the next twelve months. The reason the boundary matters is that it drives every measure of short-term solvency — working capital is current assets less current liabilities, and the current and quick ratios are built on the same two totals — so moving an item across the line changes the picture a reader forms of the entity's ability to pay its way.

Why the others are wrong

(b)After one year but within five years — This describes a non-current, or long-term, liability — the exact complement of what was asked. A term loan repayable over three years, debentures redeemable at the end of the fifth year and long-term provisions all sit here. One refinement is worth knowing because it is where the two classes touch: a long-term loan does not stay wholly non-current as it matures. The instalments falling due within the next twelve months are reclassified and shown as current maturities of long-term debt under the current liabilities, while the remainder stays long-term. So the same borrowing can appear on both sides of the line in the same balance sheet, split by when each part falls due.
(c)Within five years — Five years is not a boundary anywhere in the current-versus-non-current split; the boundary is twelve months, or the operating cycle where that is longer. There is also a logical objection that settles this option without any knowledge of the standards. Everything payable within a year is also payable within five years, so 'within five years' includes the whole of the current class and a large part of the non-current class as well. A definition that cannot separate the two things it is supposed to divide is not a definition. Whenever an option offers a wider window than another option on the same page, check whether one simply contains the other — the containing one cannot be the classifying test.
(d)Subject to a contingency — That is a contingent liability, which is a different animal altogether and is not a liability recognised in the books. Under AS 29 and Ind AS 37 a contingent liability is a possible obligation whose existence will be confirmed only by an uncertain future event not wholly within the entity's control, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably. Guarantees given on behalf of others, disputed tax demands and claims under litigation are the standard examples. It is disclosed by way of a note to the accounts rather than shown on the face of the balance sheet, precisely because it may never become payable at all. A current liability, by contrast, is certain in existence and merely short-dated: the only question about it is when, not whether.

Concept

Liabilities are classified by the time within which they must be settled, and the classification is a reporting decision with real consequences. Current liabilities are obligations to be discharged within twelve months of the reporting date or within the normal operating cycle, whichever is longer; non-current liabilities are everything else. The operating cycle is the time between acquiring the materials for processing and realising cash from the sale of what is produced, and where it cannot be identified it is taken to be twelve months. That second limb is what stops the rule being a bare calendar test: a construction company with a fifteen-month cycle treats obligations falling due inside that cycle as current even though they lie beyond twelve months. Separate from both is the contingent liability, which is not recognised at all but only disclosed, because its existence depends on something that has not yet happened. The three-way split — current, non-current, contingent — is the framework, and each of this item's wrong options names one of the other two boxes or an invented boundary between them.

For an Enforcement Officer or Accounts Officer the current-liability line is where an employer's unpaid statutory dues live, so the classification is not an abstraction: contributions payable, outstanding wages and short-term creditors all belong to this class, and the size of the total against current assets is the quickest read on whether an establishment can meet its obligations. This is the shortest stem in the accountancy block — five words — and the options are correspondingly terse. On an item like this the discrimination has to come from knowing the definition precisely, because there is no context in the stem to reason from and nothing in the option texts to pick apart.

Key facts

A current liability is one to be settled within twelve months of the reporting date, or within the normal operating cycle where that is longer.
Schedule III to the Companies Act, 2013 sets out four limbs: settlement in the operating cycle, held for trading, due within twelve months, or no unconditional right to defer for twelve months.
Examples include trade payables, bills payable, outstanding expenses, bank overdraft, short-term borrowings, provision for tax, unclaimed dividends and statutory dues payable.
Instalments of a long-term loan falling due within twelve months are reclassified as current maturities of long-term debt.
Working capital is current assets less current liabilities, and the current and quick ratios are built on the same totals.
Where the operating cycle cannot be identified, it is taken to be twelve months.
A contingent liability is not recognised in the books at all; under AS 29 and Ind AS 37 it is disclosed by note.

Three boxes — current, non-current, contingent — and one invented boundary

(a) Within a year — CURRENT→Twelve months from the reporting date, or the length of the entity’s normal operating cycle if that is longer. Schedule III to the Companies Act, 2013 puts it in four limbs: a liability is current if it is expected to be settled in the normal operating cycle; if it is held primarily for the purpose of being traded; if it is due to be settled within twelve months after the reporting date; or if the company has no unconditional right to defer settlement for at least twelve months. Everything that fails all four limbs is non-current.

(b) After one year but within five — NON-CURRENT→The exact complement of what was asked. A term loan repayable over three years, debentures redeemable at the end of the fifth year, and long-term provisions all sit here. One refinement is worth knowing, because it is where the two classes touch: a long-term loan does not stay wholly non-current as it matures — the instalments falling due within the next twelve months are reclassified as CURRENT MATURITIES OF LONG-TERM DEBT.

(c) Within five years — not a boundary anywhere→The boundary is twelve months, or the operating cycle where that is longer. There is also a logical objection that settles the option without any knowledge of the standards: everything payable within a year is also payable within five years, so the phrase would take in the whole of the current class together with a large part of the non-current class.

(d) Subject to a contingency — CONTINGENT→A different animal altogether, and not a liability recognised in the books at all. Under AS 29 and Ind AS 37 a contingent liability is a possible obligation whose existence will be confirmed only by an uncertain future event not wholly within the entity’s control, or a present obligation that is not recognised because an outflow is not probable or the amount cannot be measured reliably. It is disclosed by note rather than carried in the accounts.

Who is in the current class→Trade payables and bills payable, outstanding expenses such as wages and rent due but unpaid, short-term borrowings and bank overdraft, provision for taxation, unclaimed dividends, statutory dues such as provident fund contributions payable, and the current maturities of long-term debt.

Why the boundary matters→It drives every measure of short-term solvency: working capital is current assets less current liabilities, and the current and quick ratios are built on the same two totals, so moving an item across the line changes the picture a reader forms of the entity’s ability to pay its way. The operating-cycle limb is also what stops the rule being a bare calendar test — a construction company with a fifteen-month cycle treats obligations falling due inside that cycle as current even though they lie beyond twelve months. Where the cycle cannot be identified, it is taken to be twelve months.

Study next

The Schedule III format of the balance sheet and the order in which liabilities are presentedProvisions, contingent liabilities and contingent assets under AS 29 and Ind AS 37Working capital management and the current, quick and absolute liquidity ratiosClassification of assets as current and non-current, which uses the mirror-image testOutstanding and prepaid expenses, and the adjusting entries that put them into the right period

Common traps

Reading the class as a pure calendar test and forgetting the operating-cycle limb, which can carry an obligation beyond twelve months and still leave it current.
Treating a long-term loan as wholly non-current when part of it falls due within the year.
Confusing a contingent liability, which is only disclosed, with a current liability, which is recognised.
Choosing an option that merely contains the right answer. 'Within five years' includes everything payable within a year and much that is not current at all.
Assuming a provision is always non-current. Provision for taxation and provision for employee benefits payable within the year are current.

EPFO EO/AO accountancy items on classification are put in one short line with four terse options, and the wrong options are drawn from the neighbouring categories rather than invented — long-term liabilities and contingent liabilities in this case. Knowing the boundary as a number, twelve months, and knowing the one exception to it, the operating cycle, is enough to answer every version of this question.

Related PYQs

EPFO_EOAO_2020_Q107Open & attempt →

What is the underlying accounting concept that supports no anticipation of profits but provision for all possible losses ?

(a) Matching
(b) Materiality
(c) Consistency
(d) Conservatism

Answer(d) Conservatism

An accountancy item from the paper's second accounting block, on the concept that permits no anticipation of profits while requiring provision for all possible losses. It is the principle behind the treatment of the fourth option here: conservatism is why a probable loss is provided for in the accounts while a merely possible one is disclosed as a contingent liability and left out of the balance sheet totals.

Practice

practice — not a real PYQ
Which one of the following is NOT a current liability ?
- (a)Bills payable
- (b)Bank overdraft
- (c)Outstanding salaries
- (d)Debentures redeemable at the end of five years
Answer(d) Debentures redeemable at the end of five years
practice — not a real PYQ
A possible obligation whose existence will be confirmed only by the occurrence of an uncertain future event not wholly within the control of the entity is known as which one of the following ?
- (a)Current liability
- (b)Contingent liability
- (c)Fixed liability
- (d)Secured liability
Answer(b) Contingent liability

Why