What is Current Liabilities Meaning, Explanation, Etc. for Exams

Current liabilities represent the obligations of a company that are expected to be settled within a relatively short period, typically within one year or the operating cycle of the business, whichever is longer. These liabilities are crucial components of a company's balance sheet and reflect short-term financial obligations that must be met in the near future. Understanding current liabilities is essential for assessing a company's liquidity, solvency, and financial health.

What is current liabilities is a vital topic for the commerce related exams such as the UGC-NET Commerce Examinations.

In this article, the readers will be able to know about what is current liabilities along with other related topics in detail.

What are Current Liabilities?

In the realm of business and accounting, current liabilities are financial obligations or debts that a company must fulfill within one fiscal year or its operational cycle. These liabilities are typically settled by utilizing a current asset, creating another current liability, or through cash.

These current liabilities are displayed on a company’s Balance Sheet and include elements such as accounts payable, accrued liabilities, short-term debt, and other similar types of debt.

The average amount of a company's current liabilities plays a crucial role in several measures of its short-term liquidity, which includes:

Examples of Current Liabilities

Here are some common examples of current liabilities:

• Accounts Payable: These are amounts owed to suppliers for goods or services purchased on credit.
• Accrued Expenses: These are expenses that a company has incurred but has not yet paid, such as salaries payable.
• Accrued Interest: This includes all unpaid interest accumulated since the last payment was made.
• Bank Account Overdrafts: These are temporary borrowings allowed by banks to cover account holder's insufficient funds.
• Short-term Loans: These are loans that are due to be paid within a year.
• Dividends Payable: These are dividends declared by the company's board of directors that are yet to be paid to shareholders.
• Income Taxes Payable: This represents the amount of income taxes a company owes to the government.
• Salaries Payable: This is the amount owed to employees for their work done but not yet paid.

Calculating Current Liabilities

Current Liabilities = [Notes payable + Accounts payable + Accrued expenses + Unearned revenue + Current portion of long-term debt + other short-term debts]

What is Current and Non Current Liabilities

Current and non-current liabilities are categories used to classify a company's obligations based on their expected timing of settlement:

• Current Liabilities: Current liabilities are obligations that are due for settlement within a relatively short period, typically within one year or the operating cycle of the business, whichever is longer. These liabilities represent short-term financial obligations that must be paid or fulfilled in the near future using current assets or by creating new current liabilities. Examples of current liabilities include accounts payable, short-term loans, accrued expenses, income taxes payable, and dividends payable.
• Non-Current Liabilities: Non-current liabilities, also known as long-term liabilities or non-current liabilities, are obligations that are due for settlement beyond the next operating cycle or fiscal year. These liabilities represent long-term financial commitments that extend beyond the short term and are not expected to be settled within the coming year. Examples of non-current liabilities include long-term loans, bonds payable, deferred tax liabilities, lease obligations, and pension liabilities.

Conclusion

Current liabilities play a vital role in the financial management of a company, representing short-term obligations that must be settled within a year or the operating cycle. These liabilities include accounts payable, short-term loans, accrued expenses, income taxes payable, and other obligations due within the near term. Monitoring current liabilities is essential for assessing a company's liquidity, managing cash flow, and ensuring its ability to meet short-term financial obligations.

What is current liabilities is a vital topic for several competitive exams. It would help if you learned other similar topics with the Testbook App.