What Are Current Liabilities?
Current Liabilities Defined
Current liabilities are short-term financial obligations that are due either in one year or within the company’s operating cycle. Current liabilities are different from long-term liabilities, which refer to debts or obligations that are due in more than a year.
Current Liabilities Put Simple
Current liabilities are generally a result of operating expenses rather than longer term investments and are typically paid for by a company’s current assets.
Having an optimal amount of current assets on hand to cover current liabilities is essential to having a healthy cash flow.
Current Liabilities On The Balance Sheet
Current liabilities are listed on a company’s balance sheet below its current assets and are calculated as a sum of different accounting heads.
Examples of typical items reported as current liabilities on a company’s balance sheet are:
- Accounts Payable: The amount owed to vendors and suppliers based on their invoices.
- Deferred Revenues: The amount from prepaid revenues, such as gift cards, that is yet to be recorded on the balance sheet.
- Accrued Expenses: The amount that a company owes for interest that may not have been paid.
Current Liabilities Importance
Current liabilities are used to calculate financial ratios which analyze a company’s ability to meet its short-term financial obligations.
Current Ratio Formula
The Current Ratio is calculated by dividing current assets with current liabilities and displays the short-term liquidity available to a company to meet debt obligations.
Working Capital Formula
Working Capital is calculated by subtracting current liabilities from the total current assets available.
Current Liabilities From A Company Perspective
If current assets exceed current liabilities, then the company has enough current assets to pay off its current liabilities.
However, if a company has too much working capital, some assets are unnecessarily being kept as working capital and are not being invested well to grow the company long term.