What Are Current Liabilities?
Current Liabilities Explained in Less Than 5 Minutes
The current liabilities section of a balance sheet shows the debts a company owes that must be paid within one year. These debts are the opposite of current assets, which are often used to pay for them.
Learn more about how current liabilities work, different types, and how they can help you determine a company's financial strength.
Definition and Examples of Current Liabilities
Current liabilities, or short-term liabilities, are debts that a company must pay within the next year. These can include:
- Short-term debt, such as a line of credit
- Rent for space or equipment
- Bills for goods or services that the company owes
- Near-term obligations to provide goods or services to customers
Current liabilities and long-term liabilities together represent everything a company owes.
How Do Current Liabilities Work
Current liabilities can be found on the right side of a company's balance sheet, opposite the company's assets. Usually, you will see a list of types of current liabilities, and the amount owed in each category, plus a total figure representing all current liabilities.
Paying current liabilities is mandatory for a business. To do so, it must balance liabilities against current assets. The difference between these is the company's working capital.
Comparing the current liabilities to current assets can give you a sense of a company's financial health. If the business doesn't have the assets to cover short-term liabilities, it could be in financial trouble before the end of the year.
If, on the other hand, the business has sufficient assets to cover its current liabilities, and even a little left over, it is in a strong position to weather unexpected changes over the next twelve months.
Types of Current Liabilities
A business's balance sheet will list all the types of short-term liabilities it owes. These can fall into multiple categories, and the categories listed on a balance sheet may change over time.
Accounts payable are the opposite of accounts receivable, which is the money owed to a company. The accounts payable line item increases when a company receives a product or service before it pays for it.
Accounts payable, or "A/P," are often some of the largest current liabilities that companies face. Businesses are constantly ordering new products or paying wholesale vendors and suppliers for services or merchandise.
Well-managed companies attempt to keep accounts payable high enough to cover all existing inventory, which is listed on the balance sheet as assets.
This item in the current liabilities section of the balance sheet represents money owed to employees that the company has not yet paid, including:
- Other forms of compensation
Short-Term and Current Long-Term Debt
These current liabilities are sometimes referred to collectively as "notes payable." They are the most important items under the current liabilities section of the balance sheet.
Most of the time, notes payable represent the payments on a company's loans or other borrowings that are due in the next 12 months.
Using borrowed funds is not necessarily a sign of financial weakness. For example, an intelligent department store executive may arrange for short-term loans before the holiday shopping season so the store can stock up on merchandise. If demand is high, the store would sell all of its inventory, pay back the short-term debt, and collect the difference.
If, on the other hand, the notes payable balance is higher than the combined values of cash, short-term investments, and accounts receivable, you should be concerned.
Unless the company operates in a business in which inventory can be rapidly turned into cash, this may be a serious sign of financial weakness.
Other Current Liabilities
Depending on the company, you will see various other current liabilities listed. Sometimes they will be lumped together under the title "other current liabilities."
You may also see entries for:
- Dividends payable: The amount of money that has been approved by the board of directors to be distributed to shareholders in the future.
- Interest payable: Money that must be paid in interest to lenders.
- Income taxes payable: Money that will have to be paid to the government.
If you are looking at the balance sheet of a bank, pay close attention to consumer deposits. In many cases, this item will be listed under "Other Current Liabilities" if it isn't lumped in with them.
Consumer deposits represent the amount that customers have deposited in the bank. This money is categorized as a liability rather than an asset because, theoretically, all of the account holders could withdrawal all of their funds at the same time.
- Current liabilities are debts a company owes that must be paid within one year. They are often paid with current assets.
- Current liabilities can be found on the right-hand side of a company's balance sheet.
- Comparing the current liabilities with the assets and working capital that a company has on hand can give you a sense of its overall financial health and stability.