current liabilities

Examples of current liabilities in the following topics:

• Reporting Current Liabilities

  • They are paid off with assets or other current liabilities .
  • In addition to current liabilities, long-term liabilities are listed in a separate section after current debt.
  • However, for all long-term liabilities, any amounts due in the current fiscal year are reported under the current liability section.
  • Most current liabilities have a claim on cash or other assets.
  • Current liabilities is the first section reported under liabilities on the balance sheet.

• Defining Current Liabilities

  • Current liabilities are usually settled with cash or other assets within a fiscal year or operating cycle, whichever period is longer.
  • A current liability can be defined in one of two ways: (1) all liabilities of the business that are to be settled in cash within a firm's fiscal year or operating cycle, whichever period is longer or (2) all liabilities of the business that are to be settled by current assets or by the creation of new current liabilities.
  • Another important point is that current liabilities are many times not "current" and are actually past due.
  • A current liability, such as a credit purchase, can be documented with an invoice.
  • Current liabilities are debt owed and payable no later than the current accounting period.

• Reporting Long-Term Liabilities

  • "Notes Payable" and "Bonds Payable" are also examples of long-term liabilities, and they often introduce an interesting distinction between current liabilities and long-term liabilities presented on a classified balance sheet.
  • Continuing one year forward, Company X would report a current liability of 20,000 and a long-term liability of 60,000 on its balance sheet as of 12/31/2014.
  • What this example presents is the distinction between current liabilities and long-term liabilities.
  • Despite a Note Payable, Bonds Payable, etc., starting out as a long-term liability, the portion of that debt that is due within a year has to be backed out of the long-term liability and reported as a current liability.
  • See below for the balance sheet reporting treatment of the current and long-term liability portions of the Note Payable from initiation to final payment.

• Current Maturities of Long-Term Debt

  • The portion of long-term liabilities that must be paid in the coming 12-month period are classified as current liabilities.
  • The portion of long-term liabilities that must be paid in the coming 12-month period are classified as current liabilities.
  • The portion of the liability considered "current" is moved from the long-term liabilities section to the current liabilities section.
  • The position of where the debt should be disclosed is based on its maturity date in relation to the due date of other current liabilities.
  • If the current liability section already has an accounts payable account (balance which is usually paid off in 30 days), the current portion of the loan payable (due within 12 months) would be listed after accounts payable.

• Classifying Liabilities

  • The two main categories of these are current liabilities and long-term liabilities.
  • Current liabilities are often loosely defined as liabilities that must be paid within a single calender year.
  • For firms with operating cycles that last longer than one year, current liabilities are defined as those liabilities which must be paid during that longer operating cycle.
  • A better definition, however, is that current liabilities are liabilities that will be settled either by current assets or by the creation of other current liabilities.
  • Contingent liabilities can be current or long-term.

• What Goes on the Balances Sheet and What Goes in the Notes

  • The balance sheet lists current liability accounts and their balances; the notes provide explanations for the balances, which are sometimes required.
  • Current liabilities and their account balances as of the date on the balance sheet are presented first, in order by due date.
  • The balances in these accounts are typically due in the current accounting period or within one year.
  • Current liabilities can represent costs incurred for employee salaries and wages, production and build up of inventory, and acquisition of equipment which are needed and used up during normal business operations.
  • Current liability information found in the notes to the financial statements provide additional explanation on the liability balances and any circumstances affecting them.

• Acid Test Ratio

  • The acid-test, or quick ratio, measures the ability of a company to use its near cash or quick assets to pay off its current liabilities.
  • The acid-test ratio, also known as the quick ratio, measures the ability of a company to use its near cash or quick assets to immediately extinguish or retire its current liabilities.
  • The sum is then divided by current liabilities.
  • Note that the calculation omits inventory and a different version of the formula involves subtracting inventory from current assets and dividing by current liabilities.
  • A company with a quick ratio of less than 1 cannot currently pay back its short-term liabilities.

• Current Ratio

  • It compares a firm's current assets to its current liabilities.
  • The current ratio is calculated by taking total current assets and dividing by total current liabilities.
  • If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations (current liabilities).
  • A high current ratio can be a sign of problems in managing working capital (what is leftover of current assets after deducting current liabilities).
  • While a low current ratio may indicate a problem in meeting current obligations, it is not indicative of a serious problem.

• Reporting Contingencies

  • Contingencies are reported as liabilities if it is probable they will incur a loss, and their amounts can be reasonably estimated.
  • The amount for repairs occurring in year one is reported in the current liability section of the balance sheet; the portion relating to major repairs in three years is disclosed as long-term liability.
  • As the warranty claims are made, the liability account is debited and cash is credited for the cost of the repair.
  • The long-term liability warranty provision is moved to the current liability section in the accounting period occurring three years after the product sale.
  • Such contingent liabilities can be estimated reliably based on historical cost and readily available information.

• Defining Liabilities

  • A liability is defined as an obligation of an entity arising from past transactions/events and settled through the transfer of assets.
  • A liability is defined by the following characteristics:
  • Any type of borrowing from persons or banks for improving a business or personal income that is payable in the current or long term.
  • Types of liabilities found on a company's balance sheet include: current liabilities like notes payable, accounts payable, interest payable, and salaries payable.
  • For the current fiscal year, the company will earn 5/12 of the fee and the remaining amount (7/12) stays in a deferred revenue account until it is earned in the next accounting period.