What Are Current Liabilities?
What are Called Current Liabilities?
Current liabilities are the obligations or debts that a business is expected to settle within a short period, typically within one year. They represent the money or resources that a company owes to external parties, and they are crucial for managing the financial health of a business.
Finding multibagger stocks is important for building wealth. Discover potential multibaggers at Sovrenn Discovery
Here’s the breakdown:
1- Accounts Payable
Accounts payable are amounts that a business owes to suppliers, vendors, or creditors for goods or services received but not yet paid for. It’s like the unpaid bills you have for utilities or services at home.
2- Short-Term Loans and Borrowings
These are loans and debts that must be repaid within a year. Businesses often take short-term loans to finance their operations or cover immediate expenses.
3-Accrued Liabilities
Accrued liabilities represent expenses that have been incurred but not yet paid. For example, if a company has employees’ salaries due at the end of the month but hasn’t paid them yet, that would be an accrued liability.
4- Income Taxes Payable
This is the amount of income tax a company owes to tax authorities but hasn’t paid yet. It’s similar to the income tax you owe to the government.
5- Dividends Payable
If a company has declared dividends to its shareholders but has not yet distributed them, it records this as a current liability until the dividends are paid out.
Investing has built huge wealth for several HNI investors. Learn investing FREE OF CHARGE at Sovrenn Education
Current Liabilities Formula
Current liabilities are expected to be paid within one year or the operating cycle, whichever is longer. They are usually paid off using existing assets, which are used up within a year. Examples of current liabilities are accounts payable, short-term debt, dividends, notes payable, and income taxes owed.
Notes payable + Accounts payable + Accrued expenses + Unearned revenue + Current portion of long-term debt + other short-term debt.
Why Current Liabilities Matter:
Current liabilities are essential for understanding a company’s short-term financial obligations. They help assess a company’s ability to meet its immediate financial commitments, manage cash flow, and ensure that it can cover its short-term debts and obligations.
Just like current assets, managing current liabilities is crucial. Balancing the two is essential to maintaining a healthy financial position. Having too many current liabilities can strain a company’s liquidity, while too few can indicate underutilized resources.
Here’s the summary:
| Current Liabilities | What Are They? | Real-Life Company Comparison |
| Accounts Payable | Unpaid bills to suppliers | Similar to a company’s outstanding invoices to its vendors or suppliers. It’s like a business owing money to its suppliers for goods or services received. |
| Short-Term Loans | Debts due within a year | Comparable to a company’s short-term loans or lines of credit that need to be repaid in the near future. It’s like a business having taken out a short-term loan to cover operating expenses. |
| Accrued Liabilities | Expenses incurred but not yet paid | Analogous to a company having recorded expenses like salaries, utilities, or rent, which have been incurred but not yet paid by the company. |
| Income Taxes Payable | Unpaid income taxes | Similar to a company’s outstanding income tax liability to government authorities. It’s like a business owing income taxes for the current fiscal year. |
| Dividends Payable | Declared dividends not yet distributed | Comparable to a company declaring dividends to shareholders but not yet paying them out. It’s like a business promising to distribute profits to its investors. |
Also Read: What is Equity Capital in Business ?