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Current liabilities, found on a company’s balance sheet, are company debts that need to be paid within 12 months. Understanding how to take control of current liabilities is important so that companies can plan their finances and calculate important financial ratios.
In this post, we’ll examine what current liabilities are and how they work. We’ll also look at some examples of current liabilities and see how they differ from other types of liabilities.
What are current liabilities?
Liabilities are debts that are owed to other parties. They are obligations arising from past events that will need to be settled in future. There are three main types of liabilities:
Current liabilities, also known as short-term liabilities, are liabilities that are due for payment within a year.
Non-current liabilities, or long-term liabilities, are due for payment after a year or more.
Contingent or “other” liabilities are liabilities that may or may not arise, depending on specific events.
Current liability examples
It’s essential to keep a close eye on current liabilities in order to ensure there’s enough cash in the business to repay them. So, what might these current liabilities actually consist of? Some examples of current liabilities include:
Accounts payable: These are the opposite of accounts receivable (i.e., money owed to the company). Accounts payable refers to what a company owes to another party. Accounts payable is often the largest of all the current liabilities faced by a company.
Accrued payroll: This is money owed to employees that has not yet been paid. It can be in the form of wages, bonuses or other types of compensation.
Income taxes: This refers to money that needs to be paid to the government.
Overdrafts: Business overdrafts, as well as lines of credit, also fall into the category of current liabilities.
Short-term loans: Also referred to as “notes payable”, a company may take out a short-term loan to stock up on inventory, for example. Ideally, once the inventory is sold, the company can pay back the short-term debt and collect the difference (profit).
Interest payments: This refers to regular payments to lenders
How to calculate current liabilities from total liabilities?
Current liabilities serve as an important measure of short-term liquidity. Adding short-term and long-term liabilities together reveals the total amount owed by a company.
A company’s total liabilities are the combined debts that must be paid to outside parties. The higher the level of total liabilities, the more a company needs to pay off before they can make a profit.
Long term liabilities include debts and other financial obligations that have a maturity beyond one year. These can include deferred tax liabilities and pension obligations. Other liabilities may not fit into either the short-term or longer term categories of liabilities, for example, intercompany borrowings or sales taxes.
Typically, current assets and current liabilities are listed separately from long-term assets and liabilities in the balance sheet. This allows companies to create metrics to determine the immediate financial standing of the company. By splitting liabilities into these categories, it’s possible to illustrate how well a company is able to meet its current, short-term obligations, as opposed to its longer term obligations.
Accounting software can help to calculate current liabilities
When it comes to calculating current liabilities, accounting software like Xero can make the process far easier, with the option to create balance sheets quickly and automatically. Thanks to a mobile app, users can stay on top of their finances and view reports whilst on the go. By integrating Xero with a third party solution, like GoCardless, it’s possible to see all transactions in one place, thereby keeping even tighter control of current liabilities.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.