Current Liabilities: What is it?

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.

Current ratio

Analysts and creditors often use the current ratio to assess a company’s ability to meet its short-term financial obligations. Calculated by dividing current assets by current liabilities, this ratio indicates how effectively a company manages its balance sheet to cover short-term debts and payables. It provides investors and analysts with insight into whether the company has sufficient current assets to satisfy its current liabilities and other payables.

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.