All companies and businesses deal with liabilities in one form or another. Liabilities represent obligations that a company must settle in the future. Usually, these obligations arise as a result of the company’s past dealings. Companies must present their liabilities on the balance sheet at the end of each accounting period. Furthermore, they also have to classify liabilities as current or non-current based on their duration.
What are Current Liabilities?
Current liabilities are short-term obligations that a company must settle within 12 months. These include smaller liabilities that companies owe due to their daily operations. Usually, companies use their current assets to pay their current liability balances. For example, a company making credit purchases will accumulate accounts payable, which it expects to pay within 12 months.
Usually, current liabilities are straightforward to identify. Sometimes, however, companies must split their liabilities into both current and non-current portions. For example, a company that has obtained a loan must calculate the amount payable within and after the upcoming 12-month period. Then it must qualify the portion payable within 12 months as a current liability and the rest as non-current.
What are some examples of Current Liabilities?
The type of current liabilities that a company has depends on its operations and size. However, there are some types of current liabilities that are more common as compared to others. These include the following.
Accounts payable is the most common form of current liabilities. Accounts payable represents all the obligations that a company owes to its suppliers or vendors. If a company makes credit purchases, it will almost always have accounts payable. Similarly, accounts payable are practically always current liabilities since vendors usually allow credit terms of below a month. Accounts payable is a great way for companies to make purchases without having to worry about payments at the time.
Accounting rules require companies to record expenses when they occur rather than when they pay for them. Therefore, when these expenses take place for a company, it must create a liability for the amount. This liability is short-term and often settled within a month. Some examples of accrued expenses include utility expenses, such as electricity, phone, or water.
Short-term debt usually represents debts that a company must pay within the next 12 months. It may come from different sources, such as financial institutions or other private lenders. The purpose of obtaining short-term debts is to finance the working capital needs of a company. These debts come with higher interest rates and, therefore, companies don’t usually prefer them. Some companies also classify bank overdraft as short-term debt.
Apart from the above, companies may also have several other types of short-term liabilities. These can be taxes payable, dividends payable, salaries payable, etc. In some cases, companies may also classify advances received against future sales as current liabilities, known as unearned revenues. Lastly, companies can also split finance leases or long-term loans between current and non-current portions.
Current liabilities are short-term obligations that a company expects to settle within a year. The most common types of current liabilities are accounts payable, accrued expenses, or short-term debts. Apart from these, however, companies may also have various other liabilities that they can classify as a current liability.