Current Liabilities: Definition & Examples
Current Liabilities refer to a company's short-term financial obligations.
What are Current Liabilities?
Current liabilities are financial obligations that a company owes within a one year time frame. Since they are due within the upcoming year, the company needs to have sufficient liquidity to pay its current liabilities in a timely manner. Liquidity refers to how easily the company can convert its assets into cash in order to pay those obligations. Because of its importance in the near term, current liabilities are included in many financial ratios such as the liquidity ratio.
Where Do Current Liabilities Appear in the Financial Statements?
Current liabilities appear on the balance sheet. The balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a given point in time. Current liabilities are often separated out in a subcategory at the top of the liability section– the second section of the three.
Current Liabilities Examples
There are many general ledger accounts that may make up current liabilities. Anything that a company owes in the near term can be considered a current liability. Here are some examples and descriptions of current liabilities.
Accounts Payable
Accounts payable are amounts owed to a company’s creditors or suppliers for goods or services rendered but not yet paid. When a company receives an invoice from a supplier, it will enter the amount in the books as an account payable.
Accrued Expenses
Accrued expenses are amounts owed for a good or service that has not yet been paid. But unlike accounts payable, the company has also not yet received an invoice for the amount. Accrued expenses are assessed and recorded during the month and year end close process to accurately depict expenses in the correct accounting period according to Generally Accepted Accounting Principles (GAAP).
Salaries Payable
Salaries payable is another type of current liability account. It is the total amount of salary expense owed to employees at a given time that has not yet been paid out by the company. It is a current liability because salaries are typically paid out on a weekly, bi-weekly, or monthly basis.
Taxes Payable
Taxes payable include various taxes owed to governmental entities, such as income tax or sales tax. It is a current liability because the amount will be paid to the government in the short term.
Short-Term Debt
Short-term debt is any financial obligation that matures within 12 months. Short-term debt includes short-term bank loans, lines of credit, and short-term leases.
Current Portion of Long-Term Debt
The current portion of long-term debt is the principal portion of any long-term debt that is due within the upcoming 12 month period. For example, the 12 upcoming monthly principal payments on a mortgage or car loan are considered to be the current portion of long-term debt.
Current Liabilities Accounting Entries
The natural balance of a current liability account is a credit because all liabilities have a natural credit balance. The timing of journal entries related to current liabilities varies, but the basics of the accounting entries remain the same. When a current liability is initially recorded on the company’s books, it is a debit to an asset or expense account and a credit to the current liability account.
Accounts Payable
When a company receives an invoice from a vendor, it enters a debit to the related expense account and a credit to the accounts payable account. When the invoice is paid, a second entry is made to debit accounts payable and credit the cash account– a reduction of cash.
Accrued Expenses
At month or year end, during the closing process, a company will account for all expenses that have not otherwise been accounted for in an adjusting journal entry to accrue expenses. The adjusting journal entry will make a debit to the related expense account and a credit to the accrued expense account. The first of the following accounting period, the adjusting journal entry will reverse with a debit to the accrued expense account and a credit to the related expense account.
Salaries and Taxes Payable
Salaries and taxes payable are payroll journal entries that record the amount due to various parties as of the end of the accounting period. When a company closes its books for the month, it will accrue the amount due to its employees and the government for salaries and taxes. The entry would include a debit to the salaries and tax expense accounts and a credit to the salaries and tax payable accounts. When the money is actually paid out to the respective parties, the entry would be a debit to the salaries and tax payable accounts and a credit to cash.
Short-Term Debt
When a company receives money in exchange for a short-term debt obligation, it records a journal entry with a debit to cash and a credit to a short-term debt account. When the money is paid off in part or in full, it debits both the short-term debt account– for the principal portion– and interest expense– for the interest portion– and credits the cash account.
Current Portion of Long-Term Debt
At month or year end, a company will account for the current portion of long-term debt by separating out the upcoming 12 months of principal due on the long-term debt. The reclassification of the current portion of long-term debt does not need to be made as a journal entry. It can simply be moved to the current liability account from the long-term liability account on the balance sheet. The remainder of the long-term debt due in 13 months or further out should stay in the original account.
Current Assets vs Current Liabilities
Current assets are short-term assets that can be easily liquidated and turned into cash in the upcoming 12 month period. Current assets include accounts such as cash, short-term investments, accounts receivable, prepaid expenses, and inventory. Current liabilities are the financial obligations due in the upcoming 12 month period. Current assets should be used to cover current liabilities as they come due. Since both are linked so closely, they are often used in financial ratios together to determine a company’s liquidity.
Ratios with Current Liabilities
Several liquidity ratios use current liabilities to determine a company’s ability to pay its financial obligations as they come due. Here are two of the most common liquidity ratios.
Current Ratio
The current ratio compares a company’s current assets to its current liabilities. It is an easy ratio to calculate because both of these figures are readily identifiable on most company’s balance sheets. The drawback to using the current ratio is that the current asset figure includes both inventory and prepaid expenses. While both accounts are current assets, they are not necessarily very liquid– easily converted to cash to pay a debt obligation in the near term. The current ratio is:
Current Ratio = Current Assets / Current Liabilities
Quick Ratio
The quick ratio is a more conservative liquidity ratio that removes inventory and prepaid expenses from the current asset figure before comparing the amount to the company’s current liabilities. This ensures that only the most liquid of current asset accounts are included in the calculation as a potential source of funds for the upcoming debt obligations. The quick ratio is:
Quick Ratio = (Total Current Assets - Inventory - Prepaid Expenses) / Current Liabilities
Real World Example of Current Liabilities
Here is a look at Walmart’s consolidated balance sheet from its 2023 10-K annual report. In it, there is a subsection for Walmart’s current liabilities, which are comprised of the following accounts:
- Short-term borrowings
- Accounts payable
- Accrued liabilities
- Accrued income taxes
- Long-term debt due within one year
- Operating lease obligations due within one year
- Finance lease obligations due within one year
Walmart’s current liabilities were $92,198 million in January 2023 and $87,379 million in January 2022. To contrast, its current assets were $75,655 million and $81,070, respectively. That means its current liabilities have been greater than its current assets for the previous two accounting years. That is not a good sign of financial health or liquidity. Walmart will have to find other sources of funding to pay its debt obligations as they come due.
Additional Resources
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