A liability is something – often a sum of money – that an individual or company owes. The settlement of liabilities is done over time through transferring economic benefits like money, services, or goods. When it comes to loans, a specific type of liability is called a “current liability.” Put simply, this is a liability that will typically be repaid within a year. However, there is more ground to cover when explaining what it is and how it works.
What are they?
Current liabilities are defined as a company’s short-term financial obligations that are due either within one year or within a standard operating cycle. An operating cycle (aka. the cash conversion cycle) is the
time in which a company purchases inventory and converts it to cash from sales. A notable example of a current liability is money owed to suppliers as accounts payable.
‘Accounts payable’ is among the largest current liability accounts existing on a company’s financial statements. It illustrates supplier invoices that are not yet paid. Companies make efforts to match payment dates so their accounts’ receivables can be collected prior to when the accounts payables are owed to the suppliers.
How they work
Treatment of current liabilities for each company often varies depending on the sector or industry. Analysts, investors, and accountants typically use current liabilities to determine how well a company can meet its short-term financial commitments.
To sum up, a company has to generate enough cash and revenue in the short term so that it can fully cover its current liabilities. A lot of financial ratios use current liabilities in their calculations to figure out how sufficiently or how long a company is paying them down.
Common liabilities
Below are some of the more common liabilities that are typically found on a balance sheet:
- Accounts payable (as mentioned earlier)
- Dividends payable
- Notes payable (the major portion of outstanding debt)
- Short-term debt like bank loans or commercial paper produced to help fund operations
- The current share of deferred revenue, such as prepayments by clients for work that is not yet completed or earned
- Current maturities of long-term debt
- Interest payable on outstanding debts (ex. long-term obligations)
- Income taxes that are owed within the following year
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