What Are Current Liabilities?
Current liabilities of a company consist of short-term financial obligations that are typically due within one year. Current liabilities could also be based on a company's operating cycle, which is the time it takes to buy inventory and convert it to cash from sales. Current liabilities are listed on the balance sheet under the liabilities section and are paid from the revenue generated from the operating activities of a company.
Below, we'll provide a listing and examples of some of the most common current liabilities found on company balance sheets.
- Current liabilities of a company consist of short-term financial obligations that are typically due within one year.
- Current liabilities are listed on the balance sheet and are paid from the revenue generated by the operating activities of a company.
- Examples of current liabilities include accounts payables, short-term debt, accrued expenses, and dividends payable.
- Current liabilities can be compared with non-current, or long-term liabilities.
- It can also be contrasted with current assets.
How Current Liabilities Work
The treatment of current liabilities for each company can vary based on the sector or industry. Current liabilities are used by analysts, accountants, and investors to gauge how well a company can meet its short-term financial obligations.
In short, a company needs to generate enough revenue and cash in the short term to cover its current liabilities. As a result, many financial ratios use current liabilities in their calculations to determine how well or how long a company is paying them down.
Types of Current Liabilities
Below is a listing of frequently seen current liabilities.
Accounts payable (AP) are a company's short-term debt obligations to its creditors and suppliers. It appears on the balance sheet under the current liabilities. Accounts payable represents the total amount due to suppliers or vendors for invoices that have yet to be paid.
Typically, vendors provide terms of 15, 30, or 45 days for a customer to pay, meaning the buyer receives the supplies but can pay for them at a later date. These invoices are recorded in accounts payable and act as a short-term loan from a vendor. By allowing a company time to pay off an invoice, the company can generate revenue from the sale of the supplies and manage its cash needs more effectively.
Ideally, suppliers would like shorter terms so that they're paid sooner rather than later—helping their cash flow. Suppliers will go so far as to offer companies discounts for paying on time or early. For example, a supplier might offer terms of "3%, 30, net 31," which means a company gets a 3% discount for paying 30 days or before and owes the full amount 31 days or later.
Conversely, companies might use accounts payables as a way to boost their cash. Companies might try to lengthen the terms or the time required to pay off the payables to their suppliers as a way to boost their cash flow in the short term.
Accrued expenses are costs of expenses that are recorded in accounting but have yet to be paid. Accrued expenses use the accrual method of accounting, meaning expenses are recognized when they're incurred, not when they're paid.
Accrued expenses are listed in the current liabilities section of the balance sheet because they represent short-term financial obligations. Companies typically will use their short-term assets or current assets such as cash to pay them.
Examples of Accrued Expenses
Some examples of accrued expenses include:
- A supply purchase from a vendor but have yet to receive an invoice to pay it
- Interest payments on loans that are due in the near term
- Warranty on a service or product but has yet to be fully paid
- Real estate and property taxes that have accrued for the period
- Accrued federal, state, and local taxes
- Accumulated employee wages, bonuses, and commissions for a period that might be paid at a later date such as the following period
There are different types of taxes that companies owe and are recorded as short-term liabilities. Some of the most common taxes owed are:
- Income taxes owed to the government that have yet to be paid
- Payroll taxes that have been held from an employee but haven't been paid
- Taxes collected from their customers and paid to the government, which are recorded as sales taxes payable
Short-term debt is typically the total of debt payments owed within the next year. The amount of short-term debt as compared to long-term debt is important when analyzing a company's financial health. For example, let's say that two companies in the same industry might have the same amount of total debt.
However, if one company's debt is mostly short-term debt, it might run into cash flow issues if not enough revenue is generated to meet its obligations.
Also, if cash is expected to be tight within the next year, the company might miss its dividend payment or at least not increase its dividend. Dividends are cash payments from companies to their shareholders as a reward for investing in their stock.
Types of Short-Term Debt
Commercial paper is also a short-term debt instrument issued by a company. The debt is unsecured and is typically used to finance short-term or current liabilities such as accounts payables or to buy inventory.
Short-term debts can include short-term bank loans used to boost the company's capital. Overdraft credit lines for bank accounts and other short-term advances from a financial institution might be recorded as separate line items, but are short-term debts. The current portion of long-term debt due within the next year is also listed as a current liability.
Companies may be responsible for payroll liabilities that are due within the year. These liabilities can include Medicare payments withheld for staff. Employer benefits such as retirement plan contributions or health insurance premiums may also constitute current liabilities.
Dividends Payable or Dividends Declared
The dividends declared by a company's board of directors that have yet to be paid out to shareholders get recorded as current liabilities.
Unearned revenue is money received or paid to a company for a product or service that has yet to be delivered or provided. Unearned revenue is listed as a current liability because it's a type of debt owed to the customer. Once the service or product has been provided, the unearned revenue gets recorded as revenue on the income statement.
Example of Current Liabilities
Below are some of the highlights from the income statement for Apple Inc. (AAPL) for its fiscal year 2021.
- Current liabilities totaled $125.483 billion for the period. This is an increase of around $20 billion from the year prior.
- Accounts payable was $47.493 billion and is short-term debt owed by Apple to its suppliers.
- Commercial paper was $6.0 billion for the period.
- Term debt, which is the portion of long-term debt that's owed in the next year was $9.6 billion.
- Total current assets came in at $134.836 billion for the quarter, which shows that Apple had ample short-term assets to cover its current liabilities.
What Is the Current Ratio?
Why Is Accounts Payable a Current Liability?
Accounts payable (AP), or simply payables, refer to outstanding bills or payments that the company owes to somebody else, such as to a vendor or contractor. These payments must be made within the reporting period and so represent a current liability.
What Are Some Common Examples of Current Liabilities?
Some examples of current liabilities that appear on the balance sheet include accounts payable, payroll due, payroll taxes, accrued expenses, short-term notes payable, income taxes, interest payable, accrued interest, utilities, rental fees, and other short-term debts.
Why Are Current Liabilities Important to Investors?
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.
The Bottom Line
Current liabilities are short-term debts. There are many types of current liabilities, from accounts payable to dividends declared or payable. These debts typically become due within one year and are paid from company revenues.