Definition§
Current liabilities refer to the obligations or debts that a company must settle within one year from the balance sheet date. These liabilities are typically incurred as part of normal business operations and include various forms of short-term financial obligations.
Examples§
- Accounts Payable: Money owed by a business to its suppliers for goods and services received.
- Short-term Loans: Loans and other borrowings that must be repaid within one year.
- Current Portion of Long-term Loans: The portion of long-term debt that is due for payment within the next 12-month period.
- Accrued Expenses: Expenses that have been incurred but not yet paid, such as utilities and wages.
- Unearned Revenue: Payments received before services have been rendered or goods have been delivered.
Frequently Asked Questions§
What is the difference between current liabilities and non-current liabilities?§
- Current liabilities are obligations that a company expects to settle within one year, whereas non-current liabilities are long-term financial obligations that are due beyond one year.
Why are current liabilities important for business operations?§
- Current liabilities are crucial in assessing a company’s short-term financial health and liquidity. They must be managed effectively to ensure that the company can meet its short-term obligations.
How are current liabilities reported on the balance sheet?§
- Current liabilities are listed on the balance sheet under the heading “Liabilities” and are typically presented in order of their maturity dates.
Can current liabilities affect a company’s credit rating?§
- Yes, a high level of current liabilities compared to current assets can signify potential liquidity problems, which might affect the company’s credit rating and ability to secure future financing.
Related Terms§
- Accounts Payable: Amounts a company owes to suppliers for items or services purchased on credit.
- Accrued Expenses: Expenses that have been recorded but not yet paid.
- Current Ratio: A liquidity ratio that measures a company’s ability to pay short-term obligations, calculated as current assets divided by current liabilities.
- Working Capital: The difference between a company’s current assets and current liabilities, indicating the firm’s operational efficiency and short-term financial health.
Online References§
- Investopedia: Current Liabilities
- AccountingCoach: Current Liabilities
- Wikipedia: Liability (financial accounting)
Suggested Books for Further Studies§
- Financial Accounting by Robert Libby and Patricia A. Libby
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
- Accounting Principles by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso
Fundamentals of Current Liabilities: Accounting Basics Quiz§
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