Updated July 19, 2023
Definition of Current Liabilities
Current liability can be defined as the short-term obligation of the company, which is payable within the period of one year or the normal business cycle of the company when the business cycle extends beyond one year, and these liabilities are shown in the company’s balance sheet under the liabilities head.
Explanation
Current liabilities are the company’s short-term financial obligations that must be repaid within one year. Also, there are situations when the standard operating/business cycle extends beyond one year. In those cases, all the liabilities to be repaid within the normal operating/business cycle of the business are also to be termed the current liabilities. These current liabilities are present in the company’s balance sheet under the liabilities head as a separate section. Some examples of current liabilities include trade payable or accounts payable, Interest payable, Taxes payable, current portion of long-term debt notes payable, which are due within one year, etc.
How Does it Work?
The current liability varies from company to company according to the size & nature of the industries. The amount of current liabilities helps the users to evaluate the company’s potential to meet its short-term financial obligations by calculating the ratios such as current ratio (current assets/current liabilities) and quick ratio (quick assets/current liabilities), etc., if the balance is satisfactory then the company’s position to pay off short term debt is acceptable, but if the ratio is low, then the management should plan the strategies to generate enough revenues and recover cash so that the company can pay their short term liabilities on time. The current liability is the total of all the short-term financial obligations of the company, i.e., a sum of accounts payable, notes payable, bank overdraft, taxes payable, Interest payable, accrued expenses, and other short-term obligations, etc.
List of Current Liabilities on Balance Sheet
The list of the current liability is as follows:
1. Accounts Payable/Trade Payable
Accounts payable refers to the amount that is unpaid by the company on the specific date, i.e., It is an amount that a company owes to the outsider (suppliers) because of the purchase of goods & services made by the company in the past on credit. Examples of accounts payable are the creditors of the company.
2. Notes Payable
Notes payable is a kind of written promissory note prepared when a lender lends some money to the borrower. Through that promissory note, the borrower promises the lender to repay the money and the predetermined interest until the specified time.
3. Current Portion of Long-Term Debt
The current portion of the long-term refers to the part of long-term debt payable within one year. For example, a company has taken a loan from a bank that amounted to $500 and is repayable in five equal installments. Therefore, in the first year,$100 is repayable, i.e., $100 is repayable within one year. Therefore,$100 is the current portion of long-term debt and is reported as a current liability.
4. Bank Overdrafts
A Bank overdraft facility is given by the banks where the companies or other borrowers are given the benefit of drawing the amount over their bank account balances available. For example, the balance in the bank account of ABCCompany is $1,000 but the bank allows the company to withdraw $1,200 from their bank account.
5. Accrued Expenses
Accrued expenses have been incurred but are not yet paid by the company, so they are part of the current liability as they are to be paid within one year. For example, Salaries & wages, Interest, rent, etc.
6. Income Tax Payable
The income tax due to be paid to the government authorities becomes due at the end of the accounting year but is often paid after the end of the accounting year. Therefore, the current year’s taxes payable remain outstanding at the end of the accounting year. Thus, they are part of current liabilities.
7. Unearned Revenues
Unearned revenues are the payment received in advance from the customers to whom the goods & services are yet to be provided. It is a token amount given by the customers when they place orders for goods & services to a company supplying such material or service. For example, Mr. Achill placed an order of 100 units of mobile-to-mobile incorporation and gave an advance of $500 at the time of placing the order. Therefore, until the order is delivered to Mr. Achill, $500 will be reported as advance received from customers under the head’s current liability.
8. Dividends Payable
Dividends payable is the amount of compensation that is declared by the company but is still unpaid. Therefore, the due amount is the current liability of the company.
9. Short-Term Debts
Short-term debts are the company’s debts that the company has to repay to the lender within one year. For example, short-term loans were taken from friends, relatives, banks, and other financial institutions.
Uses of Current Liabilities
The following are the different uses of the current liabilities:
- It is one of the essential components used for calculating the short-term liquidity ratio of the company, such as the Current ratio, Cash ratio, and Quick ratio.
- It is used by the company’s different stakeholders, such as investors, analysts, accountants, etc., to know how well the company will meet its short-term financial obligations.
Conclusion
Thus, current liability refers to the short-term obligations of the business that are expected to be paid by the business entity within one year. Examples of the same are accounts payable, bank overdraft, notes payable, Interest payable, advances received from customers, accrued expenses, short-term debts, etc., and the sum of all the current liabilities are used to calculate various ratios as well as to evaluate the company’s position to meet its short term financial obligations.
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