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
For further information on current liabilities see the Wikipedia definition.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.