The current liabilities section of a balance sheet shows the debts a company owes that must be paid within one year.These debts are the opposite of current assets, which are often used to pay for them.
Learn more about how current liabilities work, different types, and how they can help you understand a company's financial strength.
Definition and Examples of Current Liabilities
Current liabilities are also called "short-term liabilities." They are debts that must be paid within the next year, including:
- Short-term debt, such as a line of credit
- Rent for space or equipment
- Bills for goods or services
- Near-term obligations to provide goods or services
Adding the short-term and long-term liabilities together helps you find everything that is owed.
How Do Current Liabilities Work?
Current liabilities can be found on the right side of a balance sheet, across from the assets. In most cases, you will see a list of types of current liabilities and the amount owed in each category. Then, you'll see a total figure that shows all of the current liabilities.
Paying current liabilities is mandatory for a business. To do so, it must balance liabilities against current assets. The difference between these is the company's working capital.
Comparing the current liabilities to current assets can give you a sense of a company's financial health. If the business doesn't have the assets to cover short-term liabilities, it could be in financial trouble before the end of the year.
On the other hand, it's great if the business has sufficient assets to cover its current liabilities, and even a little left over. In that case, it is in a strong position to weather unexpected changes over the next 12 months.
Five Types of Current Liabilities
A balance sheet will list all the types of short-term liabilities a business owes. They can fall into multiple categories, which may change over time.
1. Accounts Payable
Accounts payable are the opposite of accounts receivable, which is the money owed to a company.Accounts payable is what the company owes to others. This increases when a company receives a product or service before it pays for it.
Accounts payable, or "A/P," are often some of the largest current liabilities that companies face. Businesses are always ordering new products or paying vendorsfor services or merchandise.
Tip
Well-managed companies attempt to keep accounts payable high enough to cover all existing inventory. This is listed on the balance sheet as "assets."
2. Accrued Payroll
This item on the balance sheet shows money owed to employees, which the company has not yet paid, including:
- Salaries
- Wages
- Bonuses
- Other forms of compensation
3. Short-Term and Current Long-Term Debt
These current liabilities are sometimes referred to as "notes payable."They are the most important items under the current liabilities section of the balance sheet.
Most of the time, notes payable are the payments on a company's loans that are due in the next 12 months.
Important
Using borrowed funds isnot always a sign of financial weakness. For instance, a store executive may arrange for short-term loans before the holiday shopping season so the store can stock up on merchandise.If demand is high, the store would sell all of its inventory, pay back the short-term debt, and collect the difference.
If, on the other hand, the notes payable balance is higher than the total values of cash, short-term investments, and accounts receivable, it may be cause for concern.
Unless the company operates in a business in which inventory can be rapidly turned into cash, that may be a sign of financial weakness.
4. Other Current Liabilities
Depending on the company, you will see various other current liabilities listed.In some cases, they will be lumped together under the title "other current liabilities."
Tip
You usually can find a detailed listing of what these other liabilities are somewhere in the company's annual report or 10-K filing.
You may also see entries for:
- Dividends payable: The amount of money that has been approved by the board of directors to be distributed to shareholders in the future.
- Interest payable: Money that must be paid in interest to lenders.
- Income taxes payable: Money that will have to be paid to the government.
5. Consumer Deposits
If you are looking at the balance sheet of a bank, be sure to look at consumer deposits.In many cases, this item will belisted under "other current liabilities" if it isn't included with them.
Consumer deposits show the amount that clients have deposited in a bank.This money is a liability rather than an asset. That's because, theoretically, all of the account holders could withdraw all of their funds at the same time. Their money doesn't belong to the bank.
Key Takeaways
- Current liabilities are debts a company owes that must be paid within one year.They are often paid with current assets.
- Current liabilities can be found on the right-hand side of a balance sheet.
- Compare the current liabilities with the assets and working capital that a company has on hand to get a sense of its overall financial health.
