The current liabilities of a company are comprised of its short-term obligations. They are considered short-term liabilities because the financial obligation is expected to be paid within 12 months. Sometimes, a company’s current liabilities are based on its operating cycle. An accountant lists current liabilities on a balance sheet under the section for liabilities. They are paid for the regular revenue the company generates.
Some examples of current liabilities include all the short-term expenses the company owes. This includes accounts payable, accrued expenses, dividends payable, and other short-term debt. Each of these represents a different type of debt owed by the business or organization.
What are Current Liabilities?
Current liabilities are obligations that a company must pay within one year. Accountants and business owners watch the various liabilities closely. It’s imperative that a business has enough liquidity to pay financial obligations when they are due. In rare cases, a business’s operating cycle is longer than a year. Current liabilities are understood to be payable inside one operating cycle. Most of the time, an operating cycle is just one year. That is the time needed for a business to acquire inventory, sell it, and make a profit. For most businesses, current liabilities are due within the one-year time frame.
What are Examples of Current Liabilities?
The balance sheet contains all the current liabilities that a company owes. They are required to settle these debts within a fiscal year or a normal operating cycle which seldom varies from a year, but it can. When listing current liabilities on the balance sheet, the accounting professional lists them from the shortest term to the longest.
Listed below are the examples of current liabilities.
- Accounts Payable: For most businesses, accounts payable represents payment due to their suppliers. There are usually invoices for these raw supplies. These short-term financial obligations for a company usually cover items purchased from vendors, creditors, or suppliers. The supplies or raw materials have already been received, but payment has yet to be made.
- Short-term Debt: Short-term obligations include loans or advances. Companies use short-term debts like loans for working capital. Sometimes, they need working capital to fund daily operations. These may include bank loans if they are used to enhance the working capital of the company. Other short-term debt examples include short-term line accounts and advances from financial organizations.
- Dividends: Dividends payable are when the board declares dividends to shareholders, but they are not yet paid. Until the company pays the dividends to its shareholders, the total is written against its dividend payable account, and it remains a liability. They are usually paid within one year of the declaration.
- Notes Payable: These are common liabilities. The portion due within a year is recorded as a current liability. If the entire amount will not be paid in one year, the remaining debt is considered a long-term liability, with only what will be paid in a year listed under current liabilities on the balance sheet.
- Income Tax: Income taxes are the taxes that have been levied by state and federal governments are current liabilities if they have been incurred but not yet paid. They are recorded as short-term debt under current liabilities on the balance sheet since they are payable within a year. Common taxes that are classified as current liabilities include corporate tax, payroll taxes, sales taxes, and income taxes payable.
Where can I find Current Liabilities on a Balance Sheet?
Current liabilities are located on the right side of the balance sheet. This section is directly opposite the assets. Most of the time, the balance sheet includes a list of the various types of current liabilities along with the amount the company owes in each category. The current liabilities will be totaled and shown on the balance sheet as a single number.
What is the Current Liabilities Formula?
The line items on the balance sheet that are due to be paid by the company within a year are current liabilities. Calculating current liabilities is a simple mathematical process. It’s basically just adding up all the current liabilities listed on the balance sheet. These include notes payable, accrued expenses, accounts payable, unearned revenue, the current portion of long-term debts, and any other short-term debts owed. This can be written as a mathematical formula as such: Current liabilities=notes payable + accrued expenses + accounts payable + unearned revenue + long-term debts + other short-term debts.
How are Current Liabilities Settled?
Current liabilities are settled in various ways. Understanding the correlation between current assets and current liabilities helps a business owner strengthen their current financial position. Each business has various strategies for making sure current liabilities are settled. Here are some ways current liabilities are settled.
- Cash Payments. Is a method a business can use to settle liabilities. Payments to vendors or banking institutions can be made using cash. Paying cash toward liabilities with cash decreases cash and liability accounts.
- Prepaid Expense. A prepaid expense is a payment in advance for a future benefit. Balances on prepaid accounts can be any part of an advance payment. Businesses use these funds to pay expenses such as insurance premiums or property taxes in advance before the expense occurs.
- Dividend Payments. Dividend payments are made to stockholders. It is a return on the investment made in the business. This means of settling liabilities decreases the company’s cash account as well as the dividends payable account. The balance sheet at the end of the period will reflect the dividend payment.
- Asset Types. Businesses may choose to settle liabilities by acquiring assets instead of incurring debts. This helps keep interest charges low, or it can help minimize debt obligations. Cash payments used to acquire assets will decrease cash accounts but increases the equipment, plant, and property account.
Businesses have different ways available to settle current liabilities. The method chosen will depend on the business structure and financial condition. The accountant can provide essential information to decision-makers to help them choose which method is best to settle current liabilities.
How Long Should Current Liabilities be Paid?
Current liabilities are debts owed by a company. This type of debt is expected to be paid within an operating cycle, which for most companies is one year or 12 months. In that amount of time, they can generate assets that can be used to pay off these short-term financial obligations. There are a few exceptions, however. For some industries and businesses, the operating cycle runs longer than 12 months. In these situations, current liabilities are paid within their standard operating cycle, even if it’s a bit longer than 12 months.
How Do You Determine Average Current Liabilities?
A business needs to have a clear understanding of its current liabilities. These are bills that must be paid within the next year, even though some of them will be due in a shorter time frame. Calculating an average current liability is helpful for planning upcoming cash flow. Calculating average current liabilities is a relatively simple process.
Step 1: Locate the current liabilities totals at the beginning and the ending of the period
Step 2: Add the two totals together
Step 3: Take the sum from step 2 and divide it by two to find the average current liabilities for a period.
Determining average current liabilities involves knowing current liabilities. Finding an average is a simple mathematical calculation. Having an average for current liabilities helps with planning for financials and growth.
Is it Necessary for a Business to Pay Current Liabilities?
Yes. Items listed under current liabilities are debts or financial obligations that are due within one year. It is commonly understood that current liabilities will be paid within one year. In most cases, if it will be longer than a year, they are considered long-term liabilities, which must also be paid, but have a longer duration. Just because current liabilities are due within a year, doesn’t mean they will be paid off in full over the next 12 months. Monthly payments on a loan or other debt are current liabilities, even if the loan’s duration is longer. But the expectation is that a business will pay off its debts, including current liabilities.
Why Are Current Liabilities Important to Investors?
Current liabilities represent money the company owes and is expected to pay within the next 12 months or its normal operating cycle. For business owners, knowing their current liabilities helps them plan finances for the coming year. For investors, this information is important because they want to make sure the company will be able to meet current liabilities as they come due. Investors may base their decisions on current liabilities as it gives them a good idea of the financial health of the company.
What is the Difference Between Current and Non-Current Liabilities?
Liabilities are financial obligations a business accrued due to a series of past transactions. In simple terms, liabilities are how much a business owes to outside businesses or entities. If a business has extremely high liabilities, it may not have enough assets to offset them. Current and non-current liabilities are labeled such because of when they are expected to come due and be paid by the business.
Current vs. Non-Current Liabilities
|Current Liabilities||Non-Current Liabilities|
|Definition||Debts that are expected to be settled within 12 months.||Liabilities that are not expected to be settled within 12 months.|
|Placement on Balance Sheets||Appears on one balance sheet as they become due in one period.||Appear on consecutive balance sheets since they are payable over several years.|
|Accrued Due To:||Accrue because of obligations during day-to-day operations.||Accrue because of the need for long-term funding needs.|
|Interest||Short payback period without interest obligations.||Long-term payback with interest obligations.|
|Examples||Utility bills, short-term loans, vendors, suppliers,||Long-term bank loans, bonds|