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Definition
Current liabilities are financial obligations and debts that a company is expected to settle within one year or within the normal operating cycle of the business.
What are current liabilities?
This type of liabilities represent the portion of a company’s liabilities that are due in the short term.
Common examples of current liabilities include:
- Accounts payable: These are amounts owed by a company to its suppliers or vendors for goods or services received on credit.
- Short-term debt: This includes any loans, notes, or credit facilities that are due for repayment within one year.
- Accrued liabilities: These are expenses that have been incurred but have not yet been paid.
- Deferred revenue: This represents payments received from customers in advance of goods or services being delivered. It is a liability until the product or service is provided.
Current liabilities, along with current assets, form a critical component of a company’s working capital. Maintaining an appropriate balance between current assets and current liabilities is essential for managing cash flow and short-term financial obligations.
Current liabilities are prominently featured in a company’s balance sheet, providing a snapshot of its financial position at a specific point.
Distinguishing between current and long-term liabilities is essential for understanding a company’s financial health. Creditors and investors closely monitor a company’s current liabilities as part of their assessment of its financial stability and ability to meet short-term obligations.
Example of current liabilities
Here’s an example of current liabilities for a fictional company, ABC Corporation:
- Accounts Payable: ABC Corporation owes ₦50,000 to suppliers for raw materials and services that have been received but not yet paid.
- Short-Term Loans: The company has a short-term loan with a bank, and the outstanding amount due within the next year is ₦30,000.
- Accrued liabilities: ABC Corporation has accrued ₦20,000 for wages and other expenses that have been incurred but not yet paid.
- Income taxes payable: The company owes ₦15,000 in income taxes for the current fiscal year.
- Short-term portion of long-term debt: ABC Corporation has a long-term loan, and ₦40,000 of it is due for payment within the next year.
Now, if you sum up these current liabilities:
Current liabilities = ₦50,000 + ₦30,000 + ₦20,000 + ₦15,000 + ₦40,000 = ₦155,000
In this example, ABC Corporation has ₦155,000 in current liabilities, representing obligations that are expected to be settled within the next year.
