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 within 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 liabilities head.
Current liabilities are the company’s short term financial obligation which has to be repaid within one year period. Also, there are situations when the normal operating / business cycle of the business extends beyond the one year, in those cases all the liabilities which are to be repaid within the normal operating / business cycle of the business are also to be termed as the current liabilities. These current liabilities are present in the company’s balance sheet under liabilities head as a separate section. Some of the examples of the current liabilities include trade payable or accounts payable, Interest payable, Taxes payable, current portion of long term debt notes payable which are due within a period of 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 ratio is satisfactory then the company’s position to pay off short term debt is satisfactory but if the ratio is low then the managements 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. it is 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 past on credit. Examples of the accounts payable are the creditors of the company.
2. Notes Payable
Notes payable is a kind of written promissory note that is prepared when a lender lends some amount of money to the borrower and through that promissory note, the borrower promises the lender to repay the money back along with the predetermined interest till the specified time.
3. Current Portion of Long Term Debt
The current portion of the long term that refers to the part of long term debt that is payable within a period of one year. For example, a company has taken a loan from a bank amounted to $500 and is repayable in five equal installments. Therefore, in the first year,$100 is repayable i.e. $100 is repayable within a period of one year. Therefore,$100 is the current portion of long term debt and is reported as a current liability.
4. Bank Overdrafts
Bank overdraft facility is given by the banks where the companies or other borrowers are given the benefit of drawing the amount in excess to 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 are those expenses that have been incurred but are not yet paid by the company so they are part of current liability as they are to be paid within a span of one year. For example Salaries & Wages payable, interest payable, rent payable, etc.
6. Income Tax Payable
The income tax that is due to be paid to the government authorities becomes due at the end of the accounting year but many times paid after the end of the accounting year. Therefore, the current year taxes payable remains outstanding at the end of the accounting year. Thus, they are part of current liabilities.
7. Unearned Revenues
Unearned revenues are the payment that is received in advance from the customers to whom the goods & services are yet to be provided. It is basically a token amount given by the customers at the time when the customers place the orders of any goods & services to a company supplying such material or service. For example, Mr. Achill places an order of 100 units of mobile to mobile incorporation and gave an advance of $500 at the time of placing of an order. Therefore till the date, the order is delivered to Mr. Achill, $500 will be reported as advance received from customers under the head current liability.
8. Dividends Payable
Dividends payable is the amount of dividend that is declared by the company but is still unpaid. Therefore, the unpaid 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 a period of one year. For example, short term loans taken from friends, relatives, banks, and from other financial institutions.
Uses of Current Liabilities
The following are the different uses of the current liabilities:
- It is one of the important 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 different stakeholders of the company such as investors, analysts, and accountants, etc. to know how well the company will be able to meet its short term financial obligations.
Thus, current liability refers to the short term obligations of the business that are expected to be paid by the business entity within a period of one year. The examples of the same is 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.
This is a guide to Current Liabilities. Here we also discuss the definition and how does it work? along with list of the current liability. You may also have a look at the following articles to learn more –