Current Liabilities

What is Meant by Current Liabilities?

Current liabilities are considered as an organisation’s financial responsibility that is due within one year or during a basic operating cycle. The operating period, which can also be termed as the cash conversion cycle, can be defined as the duration required for a company to buy inventories and transform them from sales to liquid cash.


An organisation’s balance sheet shows the current liabilities. They comprise of accrued liabilities, accounts payable, short-term debt and similar kinds of other obligations.

The standard amount of current liabilities form an essential constituent of several measures. These units or measures play a significant part in short-lived cash flow of businesses; and they are -


Current Ratio

These are calculated by dividing current assets by current liabilities

Quick Ratio

This is computed by subtracting inventory from current assets and then dividing it by current liabilities

Cash Ratio

It is the liquid cash or equivalent of money which is divided by current liabilities


Examples of Current Liabilities

Here is a list of current liabilities:

  • Accrued expenses: This type of debt is noted when they are incurred, but payment has not been made. Examples can be like wages and rents, which are to be paid.

  • Accrued interest: These interests constitute the total amount of interest that needs to be paid by a borrower.

  • Accounts payable: They are simply the amount of money that is to be paid to the manufacturers.

  • Bank account overdrafts(BAO): These are the small advances that are charged by a bank due to overdrafts. A BAO takes place when a person’s bank account balance drops below zero and becomes negative.

  • Notes payable or bank loans: This is the principal portion of current long-term credit.

  • Dividends payable: This is meant by the amount declared by an enterprise’s board of directors (BOD) to the shareholders.

  • Income Taxes payable: Income taxes are imposed by the government over a portion of income that is to be paid.

  • Salary: This is the monthly wage that is provided to all the employees of an organisation.

  • Other short term debts: This constitutes the different types of obligations that are short-lived in nature and are not mentioned in the previous examples.


Task for you: Find out other types of current liabilities


Current Liabilities Meaning

The current liabilities are normally fixed by making use of existing assets. Moreover, existing assets are defined as the holdings that are used within one year. They contain accounts of receivable or hard cash which belongs to customers. The correlation of current assets to current liabilities plays an essential part in determining a company’s current capability to clear its debt.


One of the substantial current liability accounts is accounts payable. It is found on an organisation’s financial report, and it displays unpaid supplier bills. However, companies always attempt to coordinate the clearance dates. This helps a company in acquiring account receivables prior to account payables which are unpaid to distributors.


For an example, an organisation may have a 2-month term to pay dues of its suppliers, but the company provides one month for its customers to clear their finances.


Formula to Calculate Current Liabilities

There is no standard current liabilities formula to determine the value. All kinds of short-term obligations can be considered to calculate the current liability. Take a look at the formula below, which wraps most of the short-lived obligations.


Current Liabilities = Trade Payables + Short Term Loans + Current Portion of Long Term Loans + Notes Payable + Prepaid Revenues + Accrued Expenses + Other Short Term Debts


Here is a current liabilities example to provide a better understanding.


Let’s take a company ABC which specialises in publishing monthly magazines. So at the end of a fiscal year, this chart represents ABC’s balance sheet. All the different types of obligations that are short-lived in nature and are not mentioned in the previous examples.


Liabilities

Amount

Assets

Amount

Trade Payables

450

Cash and Cash Equivalent

250

Advance subscription Revenue

250

Current Investment

300

Wages Payable

150

Trade Receivables

200

Current portion of Long term loan

100

Prepaid Expense

150

Rent Payables

75

Inventories

400

Other Short term debts

200

Tangible Assets

800

Long term Debt

600

Non Tangible Assets

300

Common Equity

400

Non Current Investment

200

Retained Earning

1000



Total

3225

Total

2600


According to the formula, the current liability for ABC will be:


Current Liabilities = Trade Payables (450) + Advance subscription Revenue (250) + Wages Payable (150) + Current portion of long term loan (100) + Rent Payables (75) + Other short term debts (200)


Therefore, the value is (450 + 250 + 150 + 100 + 75 + 200) = 1225

Task for you: Following the above mentioned formula, create a table of an organisation and determine the total liability of that company.


Short Term Notes Payable Current Liabilities

Short term notes payable are financial liabilities like a particular amount and interest that are to be paid in a fiscal year. These payable notes are the repayment of funds taken on credit in a previous year. Furthermore, this concept can also be applied to the accounts payable, which are transformed into short term notes payable. This is done when a company is unable to clear the debts within a specified time.


An enterprise may prefer selecting a short term note repayment when it feels that the rate of interest may decrease in the upcoming years. By doing this, an organisation wishes to pay a high interest amount for a small duration and then will enter a long term arrangement when the interest rate goes down.


Short term notes payable fall under current liabilities on the balance sheet of an enterprise. This, in return, makes a business appear less in liquidity. However, these notes can be negotiable as well.


To have a better understanding of current liabilities, students can refer to the related topics available on Vedantu. All of our study materials are crafted by the best scholars of their respective streams.

FAQ (Frequently Asked Questions)

1. What Are Current Liabilities?

Current liabilities of an enterprise can be defined as the short duration financial obligations that are due within a fiscal year. They are repaid either by making a new liability or cash or by using existing holdings.

2. How To Calculate Current Liabilities?

To evaluate a company’s current liability, one needs to make a total of all the short term obligations like accrued expenses, notes payable, current portion of long-term debts, accounts payable, and all small tenure debts.

3. What Are The Common Examples Of Current Liabilities?

Some commonly known current liabilities are accounts payable, bank account overdrafts, sales tax payable, accrued expenses, etc.

4. What Is The Formula To Calculate Current Liability?

The formula to evaluate current liability is as follows:

Current Liabilities= Notes payables + Accounts payable + Accrued expenses + Unearned revenue + Current portion of long-term debt + various short-term outstanding