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Definition of Current LiabilitiesDownload Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others
ExplanationCurrent 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 SheetThe list of the current liability is as follows:
1. Accounts Payable/Trade PayableAccounts 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 PayableNotes 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 4. Bank OverdraftsA 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 ExpensesAccrued 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 PayableThe 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 8. Dividends PayableDividends 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 DebtsShort-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 LiabilitiesThe 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 Recommended ArticlesThis is a guide to Current Liabilities. Here we also discuss the definition and how does it work? Along with the list of the current liability. You may also have a look at the following articles to learn more –
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