Current Liabilities

Current Liabilities

Current liabilities are a company’s short-term financial obligations that are due within one year or a normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a company to purchase inventory, convert it to sales, and collect cash from its customers. Current liabilities are typically settled using current assets, which are assets that are used up within one year. Current liabilities appear on a company’s balance sheet and include accounts payable, accrued liabilities, short-term debt, and other similar debts.

Meaning of Current Liabilities

Current liabilities are obligations that a company has to pay within a short period, usually less than a year. They arise from the normal operations of the business, such as buying goods from suppliers, paying wages to employees, or borrowing money from banks. Current liabilities are important for a company’s liquidity and solvency, as they indicate how much cash or current assets the company needs to generate or raise to meet its obligations.

Definition of Current Liabilities

According to Investopedia, current liabilities are defined as:

Current liabilities are a company’s short-term financial obligations that are due within one year or a normal operating cycle.

According to BYJU’S, current liabilities are defined as:

Current liabilities are an enterprise’s obligations or debts that are due within a year or the normal functioning cycle.

The formula of Current Liabilities

There is no single formula for calculating current liabilities, as different types of current liabilities may have different methods of measurement. However, a general formula for current liabilities is:

Current Liabilities = [Notes payable + Accounts payable + Accrued expenses + Unearned revenue + Current portion of long-term debt + other short-term debt.]

How to Calculate Current Liabilities? — With Example

To calculate current liabilities, we need to identify and add up all the short-term debts and obligations that a company owes to others. For example, suppose a company has the following items on its balance sheet as of December 31, 2020:

Using the formula above, we can calculate the current liabilities as:

Current Liabilities = [$10,000 + $15,000 + $5,000 + $3,000 + $2,000 + $1,000]

Current Liabilities = $36,000

How Current Liabilities are shown in the Balance Sheet?

Current liabilities are shown on the liability side of the balance sheet, under the heading of current liabilities. They are usually listed in order of their maturity date or payment date, from the most urgent to the least urgent. For example, the balance sheet of the company in the previous example may look like this:

Important Notes About Current Liabilities

• Current liabilities are important because they must be paid shortly. If a company does not have enough cash to pay its current liabilities, it may be forced to declare bankruptcy.
• Current liabilities can be a major drain on a company’s cash flow. This is because current liabilities are typically paid using current assets, which are the assets that a company uses to generate revenue. If a company has a lot of current liabilities, it may not have enough cash to invest in long-term growth projects.
• Current liabilities can be managed by a company in several ways. One way to manage current liabilities is to extend the terms of payment to suppliers. This will give the company more time to collect cash from its customers and pay its suppliers. Another way to manage current liabilities is to negotiate lower interest rates on short-term debt.

Conclusion

Current liabilities are an important part of a company’s financial statements. By understanding the meaning, definition, formula, and calculation of current liabilities, you can better understand the financial health of a company.