What are Current Liabilities – Definition and

Examples

What Are Current Liabilities?

Current liabilities are a company's short-term financial obligations that are due within one year
or within a normal operating cycle. An operating cycle, also referred to as the cash conversion
cycle, is the time it takes a company to purchase inventory and convert it to cash from sales. An
example of a current liability is money owed to suppliers in the form of accounts payable.

Although the current and quick ratios show how well a company converts its current assets to
pay current liabilities, it's critical to compare the ratios to companies within the same industry.

Other current liabilities examples:

1. 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.
2. Accrued interest: These amounts make up the total amount of interest the borrower has to pay.
3. Accounts payable: These are just the amount due to the manufacturer.
4. 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.

5. Bank loans/Payable notes: This is the current long-term credit's main component.

6. Paying dividends: The amount that the company's board of directors (BOD) declares to its
shareholders.
7. Taxes due on income: The government pays these taxes on the portion of income required to be
payable.
8. Salary: The monthly salary that the organization pays to all employees.
9. 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

1. Accounts Payable
2. Notes Payable
3. Long Term Debt's Current Portion 
4. Accrued Liabilities
5. Unearned Revenues

1. Accounts Payable
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.

2. Notes Payable
The notes payable represents 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. 

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3. Current Portion of Long-Term Debt
It's the amount principal of debt due within one year or an operational cycle. 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.

4. Accrued Liabilities
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.

5. Unearned Revenues
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

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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.

Why Do Investors Care About Current Liabilities?

The analysis of current liabilities is important to investors and creditors. Banks, for example,
want to know before extending credit whether a company is collecting—or getting paid—for its
accounts receivables in a timely manner. On the other hand, on-time payment of the company's
payables is important as well. Both the current and quick ratios help with the analysis of a
company's financial solvency and management of its current liabilities.

What Are Some Current Liabilities Listed on a Balance Sheet?

The most common current liabilities found on the balance sheet include accounts payable, short-
term debt such as bank loans or commercial paper issued to fund operations, dividends payable.
notes payable—the principal portion of outstanding debt, current portion of deferred revenue,
such as prepayments by customers for work not completed or earned yet, current maturities of
long-term debt, interest payable on outstanding debts, including long-term obligations, and
income taxes owed within the next year. Sometimes, companies use an account called "other
current liabilities" as a catch-all line item on their balance sheets to include all other liabilities
due within a year that are not classified elsewhere.

What Is Current Ratio?

Analysts and creditors often use the current ratio which measures a company's ability to pay its
short-term financial debts or obligations. The ratio, which is calculated by dividing current
assets by current liabilities, shows how well a company manages its balance sheet to pay off its
short-term debts and payables. It shows investors and analysts whether a company has enough
current assets on its balance sheet to satisfy or pay off its current debt and other payables.

What Are Current Assets?

Current assets represent all the assets of a company that are expected to be conveniently sold,
consumed, used, or exhausted through standard business operations with one year. Current
assets appear on a company's balance sheet and include cash, cash equivalents, accounts
receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets.
Current liabilities are typically settled using current assets.

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