What Are Current Liabilities?

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on January 11, 2021

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.

What Are Current Liabilities FAQs

Current liabilities are short-term financial obligations that are due either in one year or within the company’s operating cycle.
An example of a current liability is accounts payable, or the amount owed to vendors and suppliers based on their invoices.
Current liabilities are used to calculate financial ratios which analyze a company’s ability to meet its short-term financial obligations.
Long-term liabilities are going to be around on a omapany's balance sheet for over a year. Current liabilites will be paid off within a single year's time.