Understanding 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 accrued liabilities, accounts payable, short-term debt and similar kinds of other obligations.

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

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 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.

The 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 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 are short-lived in nature and are not mentioned in the previous examples.

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.

Main Components of Current Liabilities  

1. Accounts payable: Money owed to suppliers for goods or services purchased on credit.  

2. Short-term debt: Loans or borrowings that must be repaid within one year.  

3. Accrued expenses: Expenses that have been incurred but not yet paid, such as wages, rent, or utilities.  

4. Unearned revenue: Payments received in advance for goods or services that are yet to be provided.  

5. Current portion of long-term debt: The portion of a long-term loan or liability that is due within the next 12 months.  

6. Taxes payable: Income tax or other taxes owed to the government but not yet paid.  

7. Dividends payable: Dividends declared by the company but not yet paid to shareholders.  

8. Bills payable: Amounts due based on promissory notes or other formal agreements.  

9. Interest payable: Interest accrued on loans or bonds but not yet paid.  

10. Other current liabilities: Miscellaneous obligations, such as customer deposits or provisions for short-term expenses.  

Real-Time Example of Current Liabilities

A real-time example of current liabilities is the accounts payable of a retail company like Walmart. When Walmart purchases products from suppliers, it often receives them on credit and agrees to pay the suppliers within a specified time, typically 30 or 60 days. This unpaid amount is recorded as accounts payable under current liabilities on Walmart's balance sheet.  

Another example is short-term debt, such as a small business taking out a $10,000 loan that must be repaid within six months. This loan will be listed as a current liability until it is repaid.  

Similarly, accrued expenses are common. For instance, if a company’s employees have worked for the month but their salaries are due for payment the next month, the unpaid salaries are recorded as accrued expenses under current liabilities.

These examples show obligations a company must settle within a year to maintain smooth operations.

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.

How to Prepare Notes on Current Liabilities

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Does Vedantu Have Anything on Current Liabilities?

Yes, Vedantu has ample study material on Current Liabilities. Students can go to  Current Liabilities - Meaning, Examples, Formulas and FAQ on the website and read from it.

The page has relevant information on the topic and is a comprehensive guide for all students who need to brush up on the basics before an exam. Everything provided is totally free of cost so that the students do not hesitate before reading from the page.

Current Liabilities is an interesting chapter that explains some of the most basic financial liabilities of any firm.