What is Current Liabilities
Current liabilities are a company's debts or obligations that are due within one year or within a normal operating cycle. Furthermore, current liabilities are settled by the use of a current asset, such as cash, or by creating a new current liability. Current liabilities appear on a company's balance sheet and include short-term debt, accounts payable, accrued liabilities, and other similar debts.
BREAKING DOWN Current Liabilities
Analysts and creditors often use the current ratio (current assets divided by liabilities), or the quick ratio (current assets minus inventories divided by current liabilities), to determine whether a company is able to pay off its current liabilities.
On the balance sheet, current liabilities are typically presented as follows: the principal portion of notes payable due within one year, accounts payable, and then other current liabilities, such as income taxes payable, interest payable, et al.
Examples of Current Liabilities
Accounts payable is typically one of the largest current liability accounts on a company's financial statements, and it represents unpaid supplier invoices. Current liability accounts vary per industry or according to various government regulations; examples include dividends 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, a large car manufacturer receives a shipment of exhaust systems from its vendors, with whom it must pay $10 million within the next 90 days. Because these materials are not immediately placed 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, with whom 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.