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What are Current Liabilities

What are Current Liabilities

Do you want to know what constitutes to the current liabilities of a firm? This article provides a brief explanation on this topic and its major components.
Aastha Dogra
Current liabilities can be defined as short-term debts that a company has to dispose off within a year. For settling the current liabilities, a company often uses its current assets. Both of which are listed on a company's balance sheet, which is a financial statement that depicts a company's financial standing at a given point of time. Current liabilities of a company include its accounts payable, short-term loans, dividends payable, interest payable, income tax payable, accrued expenses, and a small part of the long-term liabilities as well. To make the definition more clear, let's study each of its components individually.
Major Components
Accounts Payable
Account payable refers to the amount that a company owes to its suppliers, employees, or partners, for products or services that it is currently using or has already used. The more credit period that a company can get from these outside parties, the more will be the increase in its current assets and earnings.
Accrued Expenses
Those expenses that have already been billed, yet their due date has still not come up, are known as accrued expenses. These expenses normally occur on account of the marketing and distribution expenses of a company.
Income Tax Payable
In every country, there is a set schedule, according to which the various local, state, and federal taxes are paid. Some of these taxes may have to be paid quarterly, while others may have to be paid at the end of each year. Every company, however, withholds and makes provision for these government taxes from time to time, even if they have to be paid as lump sum at the end of the year. These expenses on income tax which are due but not paid, are counted as current liabilities for the organization.
Short Term Loans
A company might take loan from a bank or any other financial institution for a short period i.e., the loan has to be repaid within a year's time. Such loans are displayed under the "notes payable" category in the current liabilities section of the balance sheet.
Part of Long Term Debt
Sometimes a company's long-term debts, such as long-term business loans or mortgages, might have some payments which are due in the ongoing year or in a given quarter. These amounts due will be calculated as and placed under the current liabilities as "notes payable".
Other Current Liabilities
Besides the above mentioned fixed components that are always found in a company's balance sheet, there are some other components too which may arise from time to time, but may not be a regular feature. Examples of such components are "dividends payable", "bonds payable", "consumer deposits", etc.
Calculation of current liabilities and current assets is very important to arrive at the net assets of a company, which is the difference between these two. Current ratio, which is calculated by dividing the current assets by current liabilities, is a good barometer to understand whether the organization is capable enough to pay for its short-term obligations. Thus, calculation and management of their underlying components should be a top priority for the organization.