Current Liabilities on a Balance Sheet
The current liabilities section of the 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.
Current liabilities include things such as accounts payable balances, accrued payroll, and short-term and current long-term debt.
Accounts payable is the opposite of accounts receivable, which is the money owed to a company. The accounts payable line item arises when a company receives a product or service before it pays for it.
Accounts payable, or A/P as it is often referred to as, is one of the largest current liabilities companies face because they 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. Accrued payroll includes salaries, wages, bonuses, and 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 item under the current liabilities section of the balance sheet and, most of the time, 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.
Evaluating the Notes Payable
To get a sense of whether a company is wisely borrowing money (such as the department store executive) or recklessly creating an untenable debt burden, look at the notes payable amount on the balance sheet. If there isn't a separate entry for notes payable, just combine the company's short-term obligations and current long-term debt. If the total of the cash and cash equivalents line items is much larger than the notes payable amount, you shouldn't have any reason to be concerned.
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 greatly 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." Normally, you can find a detailed listing of what these other liabilities are somewhere in the company's annual report or 10-K filing.
You may also see entries for dividends payable, interest payable, and income taxes payable. Dividends payable is the amount of money that has been approved by the board of directors to be distributed to shareholders in the future. Interest payable is the amount of money that must be paid in interest to lenders. And income taxes payable is the amount of 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 an entry under Current Liabilities called "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.