A Few Examples of Current Liabilities
The types of current liabilities include notes payable, long-term debts payable, accrued expenses and accounts payable. Within these categories are specific sorts of liabilities, such as debts to employees and suppliers, bank loans, prepayments and taxes. A few examples may make current liabilities easier to understand.
In order to fund the business cycle, businesses borrow money from lending institutions. These loans can be short or long term credit. Short term loans with interest and principal payment due within the fiscal year are obviously current liabilities, but what about long term loans? For long term loans, that portion of the interest and principal due within the year is considered a current debt.
Debts to Suppliers
Businesses often reach informal agreements with their suppliers for payment plans with the expectation that payment will be made within a reasonable time period. However, it is typically in a company's best interest to delay their payment as long as possible to retain that cash in hand. Therefore, more elaborate payment plans may also involve deadlines and interest payments on the balance due. A written agreement may be required for more complicated accounts payable agreements.
Debts to Employees, Vacation Pay
Salaries and bonuses that have not yet been paid to employees are a current liability example listed under accrued liabilities. The employee earns salary daily as time passes, but the salary payment, as well as bonus payment, is made in a lump sum amount. Vacation pay benefits sometimes accumulate with the passage of time, and can also be considered a liability from the current year if it is required to be used or paid within the year. The employee accrues the vacation benefits and once that paid time off is used, the company can then reduce the liability.
Companies pay estimated income taxes to the Internal Revenue Service before the taxes are actually calculated at the close of the tax year. A deferred tax liability occurs when a company pays less than their estimated taxes and defers the remainder of the payment, creating a current tax liability. This liability temporarily saves the company from having to pay the full tax amount. Sales tax can also sometimes be a current liability if there is segregation at the time of sale, meaning that the sales tax is paid to the company but not immediately credited to the state, creating a tax debt to the government tax authority.
Ticket sales, gift cards and subscriptions are also considered liabilities from the current year because the seller has an obligation to either provide the product or service or return the payment. Because the payment has been received before delivery of the good or service, this is considered unearned revenue. When the subscription is sent or the gift card is used, the payment is removed from the liability section. As gift cards have increased in popularity in recent years, this has become a much more common category on the balance sheet of many businesses.
Basically, the current liabilities are those obligations that must be paid in the near term. On the surface, this seems to be a very simple definition, but with situations like prepayments, sales tax and vacation pay, the situation can appear a bit more complex.