Current Liabilities

A liability is an obligation to pay a third party incurred by a business as part of its trading operations. For example, when a business buys services from a supplier on credit terms, the business has a liability to the supplier to pay for the services.

Liabilities are classified as current liabilities when the business expects to settle them within its normal operating cycle or within twelve months of the balance sheet date.

The operating cycle is the time between purchasing inventory, and receiving the cash from the sale of the inventory. the operating cycle is usually less than twelve months or not identifiable, so for most businesses, a current liability is one which is due within twelve months.

Examples of Current Liabilities

Examples of balance sheet current liabilities include the following:

  • Short term notes payable
  • Accounts payable
  • Accrued expenses
  • Deferred revenue
  • Dividends payable
  • Interest payable
  • Short term loans
  • Taxes payable

It is important to correctly identify operating current liabilities, as they form an important component of the calculation of working capital, and the current and quick liquidity ratios.

For further information on current liabilities see the Wikipedia definition.

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