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.

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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.

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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 LiabilitiesWhat Are They?Real-Life Company Comparison
Accounts PayableUnpaid bills to suppliersSimilar 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 LoansDebts due within a yearComparable 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 LiabilitiesExpenses incurred but not yet paidAnalogous to a company having recorded expenses like salaries, utilities, or rent, which have been incurred but not yet paid by the company.
Income Taxes PayableUnpaid income taxesSimilar 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 PayableDeclared dividends not yet distributedComparable 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 ?