Definition of Current Liabilities
Current liabilities are obligations that a company needs to settle within one year from the date of the balance sheet. These liabilities can include various types of short-term debts, interests, payroll taxes, rents, and utility bills. They are distinct from long-term liabilities, which are debts or obligations that are due beyond one year.
Examples of Current Liabilities
- Trade Creditors: Amounts due to suppliers for goods and services purchased on credit.
- Bills of Exchange Payable: Written orders binding one party to pay a fixed sum of money to another party on demand or at a predetermined date.
- Amounts Owed to Group and Related Companies: Debts to other businesses within the same group or connected entities.
- Taxation and Social-Security Creditors: Due tax obligations and social security contributions.
- Proposed Dividends: Dividends declared by the company but not yet paid to shareholders.
- Accruals: Costs or expenses that have been incurred but not yet invoiced.
- Deferred Credit Payments Received on Account: Unrecognized revenue owing to advances received from customers.
- Bank Overdrafts: Dropping below zero in terms of cash balance.
- Short-term Loans: Loans scheduled to be repaid within one year.
Frequently Asked Questions (FAQs)
Q: What are the main components of current liabilities? A: The main components include trade creditors, bills of exchange payable, amounts owed to related companies, taxation and social security creditors, proposed dividends, accruals, deferred credit payments, bank overdrafts, and short-term loans.
Q: Why are current liabilities important in financial analysis? A: They are essential because they indicate a company’s liquidity and its ability to pay off short-term obligations. High current liabilities versus current assets might suggest liquidity issues.
Q: How do current liabilities differ from long-term liabilities? A: Current liabilities are due within one year, while long-term liabilities are due after more than one year.
Q: Can current liabilities impact a company’s credit rating? A: Yes, a high level of current liabilities compared to assets can negatively impact a company’s credit rating as it indicates potential liquidity risks.
Q: Are salaries payable considered a current liability? A: Yes, salaries that are owed but yet unpaid are part of current liabilities.
Related Terms
- Accruals: Expenses incurred by a company but not yet paid; recognized in the accounting period in which they occur.
- Deferred Revenue (Deferred Credit): Payments received by a company for goods or services yet to be delivered.
- Trade Creditors: Suppliers to whom money is owed for goods and services bought on credit.
- Bank Overdraft: A withdrawal facility allowing a customer to use more funds than it has.
Online References
Suggested Books for Further Studies
- “Accounting All-in-One For Dummies” by Kenneth W. Boyd
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- “Financial Accounting and Reporting” by Barry Elliott and Jamie Elliott
- “Principles of Accounting” by Belverd E. Needles, Marian Powers, Susan V. Crosson
Accounting Basics: “Current Liabilities” Fundamentals Quiz
Thank you for exploring the detailed facets of current liabilities with us and attempting our quiz. Keep honing your financial expertise for continued professional success!
