Current Liabilities

Current Liabilities

In accounting, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer. A more complete definition is that current liabilities are obligations that will be settled by current assets or by the creation of new current liabilities. Accounts payable are due within 30 days, and are paid within 30 days, but do often run past 30 days or 60 days in some situations. The laws regarding late payment and claims for unpaid accounts payable is related to the issue of accounts payable. An operating cycle for a firm is the average time that is required to go from cash to cash in producing revenues.  Amounts listed on a balance sheet as accounts payable represent all bills payable to vendors of a company, whether or not the bills are less than 31 days old or more than 30 days old. Therefore late payments are not disclosed on the balance sheet for accounts payable. There may be footnotes in audited financial statements regarding age of accounts payable but this is not common accounting practice. Lawsuits regarding accounts payable are required to be shown on audited financial statements but this is not necessarily common accounting practice.

Bonds, mortgages and loans that are payable over a term exceeding one year would be fixed liabilities or long-term liabilities. However, the payments due on the long-term loans in the current fiscal year could be considered current liabilities if the amounts were material. Amounts due to lenders bankers are never shown as accounts payable trade accounts payable, but will show up on the balance sheet of a company under the major heading of current liabilities, and often under the sub-heading of other current liabilities, instead of accounts payable, which are due to vendors. Other current liabilities are due for payment according to the terms of the loan agreements, but when lender liabilities are shown as current vs. long term, they are due within the current fiscal year or earlier. Therefore late payments from a previous fiscal year will carry over into the same position on the balance sheet as current liabilities which are not late in payment. There may be footnotes in audited financial statements regarding past due payments to lenders, but this is not common practice. Lawsuits regarding loans payable are required to be shown on audited financial statements, but this is not necessarily common accounting practice.

The proper classification of liabilities provides useful information to investors and other users of the financial statements. It may be regarded as essential for allowing outsiders to consider a true picture of an organization's fiscal health.

One application is in the current ratio, defined as the firm's current assets divided by its current liabilities. A ratio higher than one means that current assets, if they can all be converted to cash, are more than sufficient to pay off current obligations. All other things equal, higher values of this ratio imply that a firm is more easily able to meet its obligations in the coming year.

Current liabilities found on the balance sheet are the debts a company owes which must be paid within one year. They are the opposite of current assets. Current liabilities includes things such as short term loans, accounts payable, dividends and interest payable, bonds payable, consumer deposits, and reserves for Federal taxes.

Let's take a look at some of the most common and important current liabilities on the balance sheet.

Obligations due within one year of the balance sheet date. Another condition is that the item will use cash or it will create another current liability. This means that if a bond payable is due within one year of the balance sheet date, but the bond will be retired by a bond sinking fund the bond will not be reported as a current liability.

Definition of Current Liabilities

A company's debts or obligations that is due within one year. Current liabilities appear on the company's balance sheet and include short term debt, accounts payable, accrued liabilities and other debts. The financial accounting term current liabilities are generally defined as any debts that must be paid within one year or one operating cycle, whichever is longer.  Current liabilities are a subcategory of liabilities, which appear on a company's balance sheet.

Different liabilities

On the other side of the balance sheet are the liabilities. These are the financial obligations a company owes to outside parties. Like assets, they can be both current and long-term. Long-term liabilities are debts and other non-debt financial obligations, which are due after a period of at least one year from the date of the balance sheet.

Current liabilities are the company's liabilities which will come due, or must be paid, within one year. This is comprised of both shorter term borrowings, such as accounts payables, along with the current portion of longer term borrowing, such as the latest interest payment on a 10-year loan.

Explains Current Liabilities

 

Essentially, these are bills that are due to creditors and suppliers within a short period of time. Normally, companies withdraw or cash current assets in order to pay their current liabilities.

         Analysts and creditors will often use the current ratio, which divides current assets by liabilities, or the quick ratio, which divides current assets minus inventories by current liabilities, to determine whether a company has the ability to pay off its current liabilities.

How to Read a Balance Sheet: Current Liabilities

Current liabilities are what a company currently owes to its suppliers and creditors. These are short-term debts, all due in less than a year. Paying them off normally requires the company to convert some of its current assets into cash.

Beyond simply being bills to pay, liabilities -- confusing as this might sound -- are also a source of assets. Any money that a company pulls from a line of credit, or postpones paying from its accounts payable, is an asset that can be used to grow the business.

There are five main categories of current liabilities:

·         Accounts payable

·         Accrued expenses

·         Income tax payable

·         Short-term notes payable

·         Portion of long-term debt payable

 

Defining a Current Liability

·         A current liability can be defined in one of two ways: all liabilities of the business that are to be settled in cash within a firm's fiscal year or operating cycle, or all liabilities of the business that are to be settled by current assets or by the creation of new current liabilities.

·         Common characteristics of liabilities are borrowed funds for use that must be repaid, a duty to another party that involves the payment of an economic benefit, a duty that obligates the entity to another without avoiding settlement, and a past transaction that obligates the entity.

·         Current liabilities are many times not current and are actually past due. For example, accounts payable are due within 30 days and are typically paid within 30 days. However, they do often run past 30 days in some situations.

Current liabilities

Current liabilities represent amounts that are owed by the business and which are due to be paid within the next twelve months. Current liabilities are normally settled from the amounts available in current assets. The main elements of current liabilities are:

Non-current liabilities

              This category shows the longer-term liabilities that a business has.  By longer-term, we mean liabilities that need to be settled in more than one year’s time.  This would include bank loans which are not yet due for repayment.

Explanation

Typically, current liabilities appear on the balance sheet, and include items such as accounts payable, income taxes payable, accrued liabilities, short term debt, and the current portion of long term debt.

Current liabilities has also been defined as obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.  For example, cash a current asset, may be used to pay a trade partner accounts payable.

What is a Current Liability

In a classified balance sheet, we categorize liabilities as either or long-term liabilities. We often characterize current liabilities as obligations payable within one year or within the firm's operating cycle, whichever is longer. This general definition usually applies. However, a more discriminating definition identifies current liabilities as those expected to be satisfied with current assets or by the creation of other current liabilities.

Classifying liabilities as either current or long term helps investors and creditors assess the risk that the liabilities will require expenditure of cash or other assets in the near term. Is the due date years in the future, permitting resources to be used for other purposes without risking default or without compromising operating efficiency, Or, will payment require the use of current assets and reduce the amount of liquid funds available for other uses, If so, are sufficient liquid funds available to pay currently maturing obligations in addition to meeting current operating needs, or must additional funds be obtained by raising capital, The answers to these questions can have significant implications. A major factor contributing to the collapse of the financial giant Bear Stearns in was the reliance on short-term debt that it couldn't refinance when lenders, clients, and trading partners grew concerned about the quality of Bear's investments.

As you study the liabilities discussed in this chapter, you should be aware that a practical expediency usually affects the way current liabilities are reported on the balance sheet. Conceptually, liabilities should be recorded at their present values. In other words, the amount recorded is the present value of all anticipated future cash payments resulting from the debt specifically, principal and interest payments. This is due to the time value of money. However, in practice, liabilities payable within one year ordinarily are recorded instead at their maturity amounts. The inconsistency usually is inconsequential because the relatively short-term maturity of current liabilities makes the interest or time value component immaterial.