Updated July 17, 2023
Definition of Current Liabilities Examples
Current liability are financial obligations which an entity expects to get settled during the normal operating cycle of business or else expected to be settled within twelve months from the balance sheet reporting date; is primarily incurred for the purpose of trading or liability does not contain any unconditional right to defer obligation for a period longer than twelve months.
Explanation
Current liabilities are short term financial obligations of a company which are settled within one year time period. These are listed on the balance sheet in the liability after the non-current liabilities section.Current liabilities may vary from organisation to organisation depending on the nature of business. It is used by the accountants, analysts and other stakeholders of financial statements to gauge the capacity of the company to meet the short term obligations of financial needs. It can be concluded that company has maintained adequate working capital if it is capable of processing its current liabilities smoothly. A current liability is used by many financial ratios in order to determine the time and efficiency of the company to pay them off.In general, a current ratio of 2:1 is considered an adequate benchmark for current assets and current liabilities maintenance.
Examples of Current Liabilities
Examples of current liabilities are given below:
1. Accounts Payable
Accounts payable are short term financial obligations the short term obligations of the company covering items like amount due to vendors, suppliers, and creditors for which the material and services have been received but the amount is due for payment. Accounts payable are disclosed under the current liabilities section of balance sheet. Usually, suppliers grant a time period for payment in respect of services/ goods supplied. In lieu of supplies, the vendor gives the invoice to the customers which are recorded in the accounts payable ledger by the customer and acts as short term loan from the vendor. Once after the amount gets due, it gets paid thereby reducing both current liabilities and current assets balance.
Accounts receivable forms an important aspect in the balance sheet. High accounts payable denotes greater credit facility being availed by the company. Managing of accounts payable is very crucial for the organization.
2. Accrued Expenses
Certain expenses gets incurred as on reporting balance sheet date but remain unpaid.Such expenses are required to be recognized under profit and loss A/c along with recognition of liability simultaneously following the principle of accrual accounting concept. Accrued expenses form the part of the balance sheet being presented under the current liability section as these needs to be settled within a short period of time. In order to pay off the accrued expenses company uses current assets or short-term assets like cash. Some of the accrued expenses are as follows –
- Short term interest payment on loans
- Property and real estate taxes
- Salaries, wages, bonus, commission etc. accrued for payment
3. Taxes Payable
Tax liability includes different levies imposed by federal and state government which are incurred but not paid.These taxes are recoded as short term liability for the company and are placed in the liability side under the current liability section of the balance sheet as these will be settled within a period of one year. Some of the common tax payable accounts are –
- Corporate tax and income tax payable
- Sales tax payable
- Payroll taxes
4. Short Term Loans and Advances
Debts and obligations which needs to be settled within a period of one year are known as short term debts. These are current liabilities forming part of the balance sheet. For determining the companies working capital performance, short term debts are very important. Example – Commercial paper is an unsecured short-term debt instrument used by the company for funding its daily operations. These also include short-term bank loans which are typically used to enhance the working capital of the company. Overdrafts, short term line accounts, short term advances from financial organizations are also included in the short term debt.
5. Payroll Liability
Payroll expenses comprises the amount paid to employees in exchange of their services availed. Salaries are usually paid on monthly basis. If this amount remains unpaid as on month end date, it will be recorded as current liabilities which will be settled immediately within the coming weekdays. This is one of the common current liability item.
6. Dividends Payable
When the board of directors declare dividends to shareholders but remains unpaid, such amount will be recognized in books of accounts as dividends payable. Until the amount is paid to the shareholders of the company, the amount of dividends is written against the dividends payable account and is represented in the balance sheet under the current liability section. As the dividends are likely to pay within one year from the date of declaration,these are classified as a current liability. Accordingly, dividends payable forms part of current liability and must be included in all calculations such as current ratio, quick ratio which uses current liability. Dividends payable is somewhat odd from all other current liabilities as the payment obligation is towards its own shareholders while other liabilities are recognized as money owned to separate entities.
7. Unearned Revenue
Usually, companies do offer a time period for processing payments against goods supplied/ services offered but sometimes as per agreed in between transaction parties, consideration may be paid in advance. Such advance will be recognized as an “advance from customers”and forms part of current liabilities until and unless conditions for revenue recognition are fulfilled. Any money received in advance for which product or service is yet to be delivered is known as unearned revenue. It is debt owed to the customer and therefore it must be recognized as current liability. When the service or product is delivered or conditions for revenue recognition gets satisfied, unearned revenue gets transferred to revenue in Profit and Loss A/c.
Conclusion
Current liabilities are financial obligations that needs to repaid, settled within the normal operating cycle or within twelve months from the reporting balance sheet date. These needs to be settled within a short period of time and plays a crucial role in determining short term liquidity position of the company. Many financial institutions understand and analyze current liabilities for sanctioning and disbursing working capital loans.
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