The current liabilities are the part of a balance sheet of a company that reflects the liabilities a company owes that would be paid off within one fiscal year. Sometimes, current assets used to pay current liabilities.
What are Current Liabilities?
Current liabilities are monetary short term financial obligations of a company that are required to be paid off within one or the normal operating cycle.
Liabilities arise due to any past event or transaction that has generated economic or monetary expectations.
If an organization operates a business cycle that lasts for more than a year, the current liabilities for the said organization is defined as any liabilities over a longer period of the two periods.
Hence, current liabilities are short term obligations that are required to settle off using the company's current assets.
Current liabilities can be found on the right side of the Balance Sheet of a company. Some current liabilities examples are creditors, short term loans, interest payable etc.
How do Current Liabilities work?
The current liabilities are usually to be paid off within a year using the current assets of a company. Current liabilities are short term obligations that measure the liquidity position of a company and its ability to meet its liabilities that are due.
A business must pay current liabilities and current liabilities against current assets. The ratio of current liabilities to current assets is determined by the company's short term financial health.
If a company doesn't have sufficient current assets to meet its short term obligations, it may be facing financial trouble before the end of the year.
Similarly, if a company has enough short term assets to settle its current liabilities, it may indicate the company is in a good position and a company can survive without hassle.
What are the different types of Current Liabilities?
A company's balance sheet has different types of liabilities and they may have different categories, which change over time.
1. Accounts Payable
Accounts payable is the amount payable to the suppliers of goods and services related to the ordinary course of business. It is also called trade payables.
For example, ABC Company is an automobile manufacturing company. It procures tyres from XYZ It on a credit basis. The amount payable to XYZ Ltd. will be shown as "Trade payables" under the head of current liability in the balance sheet of ABC Ltd.
2. Accrued Expenses
Accrued expenses are expenses that are recognized when they are incurred, has not been paid yet.
Accrued expenses are recorded as a current liabilities section in the balance sheet because they reflect short term financial liabilities. Hence, companies use the current assets as cash or cash equivalents to pay this obligation.
Examples of Accrued Expenses:
Few examples of accrued expenses include:
- Salaries
- Wages
- Bounces
- Other compensations
3. Short Term Borrowings
Short term borrowings refers to the amount of money borrowed for a short period (due within one year) from the bank, financial institution or other entity for financing the working capital needs.
For example, a company takes a loan against its stocks for a short period.
4. Other Current Liabilities
It includes the outstanding expenses, other than the obligation directly related to operations that have not been paid yet.
For example, outstanding rents, outstanding salary etc.
You may also look at these current liabilities,
Dividends payable
The amount of money that will be approved by the company's board of directors and directly paid to the shareholders.
Unearned Revenue
Unearned revenue is the money that paid in advance made by the customers to a company for goods and services that will be delivered in the short term. Unearned revenue is listed on the income statement.
Taxes Payable
It reflects the amount of taxes owed to the government which are already due but not paid yet.
Current Liabilities Formula
The current liabilities formula as follows:
Current Liabilities = Notes Payable + Accounts Payable + Short Term Loans + Accrued Expenses + Unearned Revenue + Current Portion of Long-Term Debts + Other Short Term Debts
Where,
Notes Payable = NP
Accounts Payable = AP
Short Term Loans = STL
Accrued Expenses = AE
Unearned Revenue = UR
Current Position of Long Term Debts = COLTD
Other Short Term Debts = OSTD
Current liabilities Example
In December company XYZ Ltd had -
Rs. 2,00,000 in notes payable
Rs. 2,00,000 in accounts payable
Rs. 3,00,000 in short term loans
Rs. 5,00,000 in accrued expenses
Rs. 2,50,000 in unearned revenue
Rs. 1,00,000 in the current position of long term debts
Rs. 2,00,000 in other short term debts
Here's the balance sheet of company XYZ Ltd for 2020 as follows:
| Liabilities | Value (₹) |
| Current Liabilities | |
| Notes Payable | ₹200,000 |
| Accounts Payable | ₹200,000 |
| Short-term Loans | ₹300,000 |
| Accrued Expenses | ₹500,000 |
| Unearned Revenue | ₹250,000 |
| Current Position of Long-term Debts | ₹100,000 |
| Other short-term Debts | ₹200,000 |
Current liabilities = Rs. 2,00,000 + Rs. 2,00,000 + Rs. 3,00,000 + Rs. 5,00,000 + Rs. 2,50,000 + Rs. 1,00,000 + Rs. 2,00,000
Current Liabilities = Rs. 17,50,000
Hence, the total current liabilities of XYZ Ltd in December 2020 would be = Rs. 17,50,000
Financial Ratios Using Current Liabilities
Typically, investors mostly focus on current liabilities Instead of the current assets of a company because it would vastly impact the liquidity of a company.
Hence, the current assets do not bear important outcomes for investors to control the current liability. There are several ratios involving current liabilities as follows:
1. Current Ratio
The current ratio is a liquidity ratio that reflects the current assets or short term assets that are sufficient to repay the current liabilities within one year.
The current ratio assists to conduct the liquidity condition in the company. The current ratio is also known as the "working capital" ratio that establishes a relation between the current assets and current liabilities of the company.
The current ratio formula is given below -
Current Ratio = (Current Assets / Current Liabilities)
2. Quick Ratio
The quick ratio is an indicator of the short term liquidity position of a company and measures a company's ability to pay its short term liabilities with the most liquid assets.
The quick ratio also indicates how instantly a company can utilise its short term assets ( assets that can be transformed quickly to cash) to pay off short term liabilities. Therefore, the quick ratio is also known as the acid test ratio as well.
The quick ratio formula as follows -
Quick Ratio = (current Assets - inventory - prepaid Expenses) / current Liabilities
3. Cash Ratio
The cash ratio is also known as the super quick ratio that measures the cash position of the company to pay off immediate short term obligations.
The ratio estimates the ability of a company to pay back its short-term obligation with cash or near-cash reserves, such as securities that are easily marketable.
Look at the cash ratio formula below-
Cash Ratio = (Cash and cash equivalents / Current Liabilities)
What are the differences between Current Liabilities and Non-Current Liabilities?
There are many differences between current liabilities and non-current liabilities. Look at the difference in the below table.
| Subject | Current Liabilities | Non-current Liabilities |
| Definition | These are short term obligations that need to be written off within one year. | These obligations have to be settled over a year. It is also known as long term liabilities. |
| Examples |
|
|
| Treatment in Balance Sheet | Current liabilities are listed on the right side of the balance sheet. | Non-current liabilities are recorded on the right side of a balance sheet, generally under the ‘Current liabilities’. |
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