Identifying the business’s debt or financial obligation is an excellent way to assess its short-term financial standing. To do so, one must have a clear understanding of the current liabilities of a business. Knowing the current liabilities helps to estimate whether or not a business has the monetary means required to meet its various financial obligations.
Therefore, business owners as well as other business stakeholders should have a solid understanding of current liabilities and how they affect a business. In this article, we will walk you through the concept of current liabilities with their types and examples.
What are Current Liabilities?
Current liabilities refer to a company’s short-term financial debts due within one financial year or a standard operating cycle. Also known as the cash conversion cycle, this operating cycle is the time required by a company to buy inventory and convert this inventory to cash via sales.
Examples of current liabilities include funds owed to business vendors in accounts payable form. A company’s balance sheet records these current liabilities and includes accrued liabilities, funds payable, short-term obligations, and similar kinds of other debts.
Another example of current liabilities can be bank account overdrafts, which are short-term loans outlined by banks for overdraft purposes. Apart from this, dividends and income tax payable are also some examples of current liabilities.
While there are many ways to settle current liabilities, the most suitable one is to pay them using current assets. These current assets refer to the existing assets that the company can use within one year, and it includes accounts receivables or cash.
Importance of Current Liabilities
Although current liabilities show future financial obligations, they are a crucial aspect of a company’s operations. In addition, current liabilities play an essential role in financing a company’s operations and paying for significant expenses required for diversifying the business operations.
Liabilities even make company transactions efficient and smooth. For example, if a business has to make small payments for every purchased quantity, each time a material gets delivered, it would have to make payments within a short duration.
Types and Examples of Current Liabilities
The current liabilities list may vary from company to company, depending on the nature of their business. Used primarily by accountants, stakeholders, or financial accounts analysts, these current liabilities help companies measure their capacity to fulfill short-term obligations or financial needs.
So if we say that a company has sufficient working capital, it implies that the organization is processing its current liabilities smoothly. Mentioned below are some current liabilities examples.
1. Accounts Payables
Accounts payables refer to a company’s short-term financial obligations that include items like the sum due to suppliers, vendors, and creditors from whom the company received goods and services, but the payment for which remains due. In the balance sheet, these accounts payable get recorded under the current liabilities section. In return, the vendors grant a term for clearing the outstanding sum for the goods or services supplied.
This invoice provided by the supplier gets recorded in the accounts payable ledger by the company and serves as a short-term loan from the vendor. And once this liability gets settled, the accountant reduces the paid sum from the current assets and current liabilities section in the balance sheet. An example of accounts payable can be the amount owed to creditors of the company.
2. Accrued Expenses
Accrued expenses are the type of current liability in which the debt gets reported in the balance sheet, but the payment remains unpaid. Therefore, companies must identify such accrued expenses following the accrual accounting principle. These are the expenses that have become due but have not yet been paid by the company.
Accrued expenses constitute part of the balance sheet presented under the current liability section as they must get settled within a specified term. In addition, to settle these accrued expenses, the company may use short-term assets or current assets like cash.
Some of the common examples of accrued expenses are as follows –
- Short term loan interest payment
- Real estate taxes
- Salaries, bonuses, wages, commission, etc., due for payment
3. Taxes Payable
Tax payable includes various taxes levied by national and state governments, incurred but not settled. These taxes get recorded as short-term liability under the liabilities section of the balance sheet.
Some of the examples of taxes payable are as follows:
- Income tax payable and corporate tax
- Payroll taxes
- Sales tax payable
4. Short-term Advances and Loans
Debts and obligations settled within a year are known as short-term advances and loans. These are current liabilities that make up part of a balance sheet. In addition, an example of short-term advances and loans is commercial paper, which is an unsecured short-term debt instrument.
5. Payroll Liability
Payroll liability includes the sum paid to the organization’s employees in exchange for their services availed. An example of this can be the salary and wages that a company pays its employees. In addition, while salaries and wages usually get paid monthly, if unpaid, companies will enter it in the balance sheet under the current liabilities head.
6. Dividends Payable
When the board of directors in a company declares dividends to its shareholders, but the amount remains unpaid, such sum will get recorded in statements of accounts as dividends payable. As the shareholder dividends are likely to be paid within one year from the declaration date, they are classified as a current liability.
7. Unearned Revenue
While businesses present a term for processing payments against goods or services offered, sometimes they need an advance payment. Such advance payment is known as an “advance from clients” and forms a part of current liabilities. Additionally, any sum received in advance for which a service or product is yet to be delivered is unearned revenue. This is because the business is still liable to render goods or services against the advance received.
Current liabilities v/s non-current liabilities
Here is a tabular representation showing the difference between current liabilities v/s non-current liabilities.
| Current liabilities | Non-current liabilities |
| Current liabilities are financial obligations that a company writes off during one operating cycle. | Non-current liabilities are financial obligations that a company writes off in more than one operating cycle. |
| Current liabilities get recorded on the right-hand side of a company’s balance sheet above the non-current liability section. | Non-current liabilities get recorded on the right-hand side of a balance sheet under the current liabilities section. |
| Examples of current liabilities are accounts payable, outstanding expenses, and short-term loans. | Examples of non-current liabilities include bonds, debentures, and mortgage loans. |
The Bottom Line
In a nutshell, current liabilities are financial debts due for payment within the standard operating cycle of twelve months. In addition, these current liabilities play a crucial role in assessing the short-term liquidity position of a company.