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What Are Current Liabilities?

Picture of man examining papers with current liabilities

Current liabilities are what a company needs to pay within the next 12 months or within its normal operating cycle. Knowing your current liabilities is important because it enables you to plan your finances and calculate important financial ratios. Here we’ll cover a list of items that are added up to determine the total current liabilities of your business.

Accounts payable

This is the amount you owe for the products and services you have been invoiced for. Since invoices are usually due within 30 days, they fall within this category. The key is to keep track of what you owe other businesses. You can achieve this by updating your accounts as soon as an invoice comes in and when you pay an invoice. Using accounting software, such as Xero, will simplify this task. When your accounting is up to date, you can determine your accounts payable in a few seconds.

Prepayments made to your company

When you are paid in advance for a product or service, the amount is a liability until you deliver what has been paid for. In the other hand – as covered in What Are Current Assets? –  payments your business makes in advance are categorised as current assets. These prepayments will include deposits and down payments. These funds are a liability until the product or service is delivered.

Short-term debt

This is classified as debts payable within the next twelve months. This could be a short-term loan or other short-term obligations. Notes payable, which are promissory notes to pay a debt, also fall into this category.

Business overdraft or line of credit

As a short-term or revolving line of credit business overdrafts and lines of credit are current liabilities. Learn more about business overdrafts and business lines of credit.

Portion of long-term debt due in the next 12 months

A business with long-term liabilities will need to make regular payments on these. Those that fall within the next 12 months fall into the current liabilities category.

Dividends declared

This will only apply to companies that have investors or are publicly traded. Once a dividend has been declared, the company has a liability for the amount of the declared divided times the number of shares outstanding. This is also known as dividends payable.

Taxes payable

Whatever a company is expected to owe in taxes fall into this category. Company tax is based on the amount of profit in the timeframe in question. Good and services tax include the taxes collected minus the amount paid for business-related products and services in the given period. Payroll tax is another item that falls into this category.

Superannuation payable

In Australian, employers are required to pay superannuation in addition to salaries and wages. The superannuation accrued and not paid into employee funds yet is a current liability.

Using current liabilities to determine the current ratio and quick ratio

Knowing current liabilities is helpful in providing insights into the financial health of your business. The current ratio measures a company’s short-term liquidity and is simply calculated using the following equation:

Current ratio = Current assets/Current liabilities

When the current ratio is less than 1, it shows that current liabilities exceed current assets, showing that the company will have trouble paying what you owe. When the number is greater than one, the you should be able to cover what your business owes in the short term. If the number is too high, it can be a sign that the business is not effectively using its current assets or short-term liabilities. 

When a business is in a position where current liabilities exceed current assets, it’s likely that the business has cash flow challenges. Business loans from Moula are one option for overcoming short-term working capital shortages. 

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