Everyone can probably agree that more cash in the pocket is a good thing. Current liabilities are bills that must be paid using cash, services, or by securing a loan. However, by delaying the payments as long as possible, businesses ensure that there is more cash in their pockets today.
What are Current Liabilities?
Liabilities are debts owed by a business to other parties. In accounting, the liabilities will be shown on the balance sheet. Debts that are due within one fiscal year or during the annual operating cycle of the business are called current liabilities. These are debts that will be paid using current assets or by securing new financing. Examples are notes payable, long-term debts payable, accrued expenses and accounts payable.
Short Term Notes Payable and Current Long Term Debt
Notes payable, which includes written short term obligations and long term current debts, are listed under current liabilities on the balance sheet. These notes payable and long term debts payable are those loan expenses with or without interest payments due within the year. Long term debts are not actually liabilities from the current year, but those portions of the payments that are due with the fiscal year are shown on this part of the balance sheet. Most balance sheets will show the due date of the debt and the interest rate in a footnote.
Accounts Payable and Accrued Expenses
Sometimes viewed as interest-free short term financing, accrued expenses and accounts payable are bills that have not yet been paid. Accounts payable is money owed to suppliers for those products or services received but not paid for immediately. Accrued expenses are wages, taxes and interest that have not yet been paid and add up on the balance sheet until they are due. A business can increase their available current assets by delaying the expense of accounts payable and not paying their debts until the final due date.
Payment with Current Assets
Payment of debts typically involves using current assets, creating another liability, or providing a service. The opposite of current liabilities, current assets are the value of those assets that can be converted into cash within the year. Current assets include accounts receivable, inventory, short-term investments, and cash. These liquid assets are used to pay the liabilities, or another liability such as a bank loan could be acquired to pay the current debt.
Dividing total current assets by the total current liabilities provides the current ratio. This ratio represents the liquidity of the business, or its ability to repay the liabilities using current assets. A ratio of less than one suggests that the business is low on cash, but this does not necessarily mean that the company is in financial trouble as financing can often be secured to pay debts. However the current ratio can show how quickly a business is getting paid for selling their goods, which can differ widely across industries.
Current liabilities may appear to be negative for a business, bills and payments due with the year that have not yet been paid. However, these liabilities can be seen as a free loan, due until paid, keeping the almighty cash in hand as long as possible.