Current Liabilities

Loading the player...

What are 'Current Liabilities'

Current liabilities are a company's debts or obligations that are due within one year, appearing on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts.

Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities.

BREAKING DOWN 'Current Liabilities'

Analysts and creditors will often use the current ratio, (which divides current assets by liabilities), or the quick ratio, (which divides current assets minus inventories by current liabilities), to determine whether a company has the ability to pay off its current liabilities.

In the course of conducting its operations, a company may obtain short-term loans or acquire input materials and services from its vendors and pay for them at a later date. Because the company has to honor these obligations in the future as a result of past transactions or events, this gives rise to corresponding liabilities. Liabilities due on demand or within one year are classified as current liabilities on a company's balance sheet.

Examples of Current Liabilities

Accounts payable is typically one of the largest current liability accounts on a company's financial statements, and it represents any unpaid invoices a company has from its suppliers of materials and services used in the production process. Other names for current liability accounts vary by industry or government regulation, and also include dividend payable, customer deposits, current portion of deferred revenue, current maturities of long-term debt and interest payable. 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 not classified elsewhere.

Accounting for Current Liabilities

When a company determines it received an economic benefit that must be paid within a year, it must immediately record a credit entry for a current liability. Depending on the nature of the received benefit, the company's accountants classify it as either an asset or expense. For example, consider a large car manufacturer that receives a shipment of exhaust systems from its vendors, and must pay them $10 million within the next 90 days. Because these auto parts do not go immediately into production, the company's accountants record a credit entry to accounts payable and a debit entry to inventory for $10 million. When the company pays its balance due to suppliers, it debits accounts payable and credits cash for $10 million.

Suppose a company receives tax preparation services from its external auditor for which it must pay $1 million within the next 60 days. The company's accountants record a $1 million debit entry to the audit services expense account and a $1 million credit entry to the other current liabilities account. When a payment of $1 million is made, a $1 million debit entry to the other current liabilities account and a $1 million credit to the cash account are made.

RELATED TERMS
  1. Other Current Liabilities

    A balance sheet entry used by companies to group together current ...
  2. Liability

    A company's legal debts or obligations that arise during the ...
  3. Long-Term Liabilities

    In accounting, a section of the balance sheet that lists obligations ...
  4. Total Liabilities

    The aggregate of all debts an individual or company is liable ...
  5. Other Long-Term Liabilities

    A balance sheet item that includes obligations which are not ...
  6. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...
Related Articles
  1. Investing

    Current Liabilities

    Current Liabilities are company debts due within one year or one operating cycle, whichever is greater. An operating cycle is the time it takes a company to purchase inventory and convert it ...
  2. Professionals

    Balance Sheet Components - Liabilities

    CFA Level 1 - Balance Sheet Components - Liabilities. Learn about the different types of liabilities. A top down approach into the components of long-term and current liabilities.
  3. Investing

    What's a Liability?

    A liability is a debt. It is an obligation that arises during the course of business and represents a third-party claim on the company's assets. A liability can arise in a number of different ...
  4. Forex Education

    4. Learn The Different Liabilities

    Learning to read the balance sheet can provide great insight into the financial strength of a company.
  5. Professionals

    The Balance Sheet

    Find out how to read this financial statement, and what it says about a company.
  6. Professionals

    Current Liability Basics

    CFA Level 1 - Current Liability Basics. Learn the basic types of liabilities, including definitions for current and long-term liabilities, warranties, taxes and vacation-pay.
  7. Economics

    Explaining Long-Term Liability

    A long-term liability is an obligation a company owes a year or more into the future.
  8. Forex Education

    Current Ratio

    Investing is a complex and often daunting experience, these equations are actually quite simple.
  9. Investing Basics

    Explaining Noncurrent Liabilities

    Noncurrent liabilities are financial obligations a company owes a year or more into the future.
  10. Professionals

    Financial Statement Analysis

    Financial Statement Analysis
RELATED FAQS
  1. How are accounts payable listed on a company's balance sheet?

    Find out how accounts payable is listed on a company's balance sheet, why it is considered a current liability, and how it ... Read Answer >>
  2. What is the difference between an expense and a liability?

    Learn what liabilities and expenses are, which financial statements they are listed on, and the differences between liabilities ... Read Answer >>
  3. What are some examples of current liabilities?

    Examine some common examples of current liabilities a company may owe within a year or less in order to accurately assess ... Read Answer >>
  4. Are accounts payable an expense?

    Learn about how to differentiate between liability accounts and expense accounts, and see why accounts payable is considered ... Read Answer >>
  5. Are accounts payable a liability?

    Take an in-depth look at accounts payable, or trade payable, an important current liability account listed on a company's ... Read Answer >>
  6. How do I calculate current liabilities in Excel?

    Learn what current liabilities are and examples of a company's current liabilities, and find out how to calculate total current ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center