Current liabilities are debts that a company has to pay during a normal operating cycle, generally not more than 12 months (as opposed to long-term obligations due after the 12-month mark). Repaying current liabilities is an obligation. To achieve this, the company has to control the relationship between its current assets and liabilities carefully.
The term working capital displays the gap between them, and it is one of the big figures a business must consider to determine the liquidity of its assets. Current liabilities are listed alongside longer-term liabilities that appear on the balance sheet. Together, they represent all the debts the business has to pay.
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You can define a current liability as all the obligations of the business to be settled using current assets or through creating new liabilities during the current fiscal year.
What are Current Liabilities?
You can usually resolve current liabilities by making use of existing assets. Furthermore, existing assets are those assets that we use within one year. They comprise accounts of receivables or hard cash that belong to customers. The relation between current assets and liabilities is crucial in determining the company's present capacity to repay its debt.
One of the major current liability accounts is accounts payable. It can be found in an organisation's financial report and shows invoices from suppliers that are not paid. However, organisations always try to set up the date of the clearing. This aids a company in acquiring receivables for accounts before the account payables that remain unpaid to distributors.
For instance, a company might have a two-month period to pay suppliers. However, the company will provide one month for its customers to pay their bills.
Also Read: Accounting Liabilities: What Are They?
Current Liability Examples
Examples of classic obligations are the amount that the company owes HMRC for tax purposes, like the corporation tax or VAT tax. Besides that, it includes money the company owed to suppliers, for example, an accountant or a solicitor. If you own a company with restrictions, you'll see your current liabilities as "creditors that are due in the next calendar year" within the statute account that companies file.
Other current liabilities examples:
- Accrued expense: This type of debt is referred to when incurred; however, you've not paid the payment. Examples include rents or wages that are due.
- Accrued interest: These amounts make up the total amount of interest the borrower has to pay.
- Accounts payable: These are just the amount due to the manufacturer.
- Bank account overdrafts(BAO) are the small amounts of advances that a bank bills due to overdrafts. BAO occurs when a person's account balance falls below zero, and it then goes negative.
- Bank loans/Payable notes: This is the current long-term credit's main component.
- Paying dividends: The amount that the company's board of directors (BOD) declares to its shareholders.
- Taxes due on income: The government pays these taxes on the portion of income required to be payable.
- Salary: The monthly salary that the organisation pays to all employees.
- Other types of short-time debts: These include the various kinds of temporary obligations but aren't part of the previously mentioned examples.
Other Current Liabilities List
Current liabilities comprise:
- Accounts Payable
- Notes Payable
- Long Term Debt's Current Portion
- Accrued Liabilities
- Unearned Revenues
We also call them trade payables. These are the amounts due to its suppliers purchasing items or services through credit. These amounts are incurred due to the time gap between the receipt of goods or services, the acquisition of the title of goods, and the payment for the goods and services. The period during the credit extension to businesses usually can be between 30 and 60 days.
Accounts payable are present in the current liabilities section on the balance sheet. This means that a company can understand the issues with credit that confront the company and its suppliers.
The accounts payable account is debited with the value of these purchases once an entity purchases to credit. Therefore, the credit ledger accounts need to be closed books of accounts after payment for these accounts payable is received, decreasing the bill payable amount on the balance sheet.
The notes payable represent nothing more than the obligation of a business concerning promissory notes it owes its lenders. There are agreements that a business will make a specific amount of money to its lenders at a specific future date. The notes payables are from purchases, financing or other transactions carried out by a business.
In addition, notes payable can be classified as long or short term based on the duration of their maturity. Therefore, notes payable having a maturity period longer than one calendar year are listed as non-current liabilities. In comparison, notes with a maturation period shorter than one year are reported as current liabilities on the balance sheet.
Current Portion of Long Term Debt
It's the amount principal of debt due within one year or an operational cycle (whichever is the greater). The long-term debt could comprise mortgage notes, bonds and other long-term debts. After considering the current amount of long-term debt, the remaining balance is what we call long-term debt on the balance sheet.
However, we shouldn't regard this current amount of long-term debt as a current obligation if the debt:
- The debt is paid off with the assets that have been accumulated for this reason, as long as the assets have not been identified as actual assets.
- Refinanced from the loan amount through the availing of new debt
- Changed into capital stock
There is no use of current liabilities or existing assets in such circumstances. So, classifying the current portions of long-term debt as a valid option is impossible. Therefore, to use this type of debt, we need to add a footnote below the financial statements that clearly state that it is an ongoing obligation.
You can also refer to accrued liabilities in the field of accrued expense. Companies incur or report expenses in their income statement but are not legally due. So, the business must acknowledge the expense as the profit it receives. However, the cash to cover the expense is still due. These obligations are the result of the accrual method of accounting. According to this method, charges are recorded in the order they were paid. This is in line with accounting for timing and matching rules of accounting.
For instance, Patel Pvt Ltd has to pay an annual interest of ₹1,00,000. This is on the outstanding loan from a bank. Therefore, Patel Pvt Ltd would be able to recognise the amount of ₹25,000 from the overall interest cost on their income statements at the close of March. Additionally, the company will add the accrued liability by the same amount on its balance sheets. In the meantime, Patel Pvt Ltd will keep showing the same amount in its accounts books even though the liability isn't yet due until the year's end.
You can also refer to unearned income as unearned earnings, deferred revenue, or deferred income. These are the money that a business collects in advance of supplying products and services. The business gets money to purchase items or services that it's yet to supply
Thus, this income can be considered an advance payment for items or services that a company is expected to create or offer to the buyer. Therefore, the seller is liable for an obligation equal to the revenue earned in advance until the delivery is completed. This is because of being liable for the payment in advance.
Investors will use calculations such as the current ratio to divide assets by liabilities to judge the business's liquidity. Analysts can use the current ratio to calculate the ratio of assets to liabilities to evaluate the company's liquidity. The greater the ratio, the more secure the business's financial position is. A lower than one ratio will indicate that current liabilities are greater than the current assets.