Current Liabilities | Components, Formula and Presentation

What are Current Liabilities?

Current Liabilities refer to those short-term financial obligations that are due within 12 months or within the normal operating cycle of business, these are normally the amounts payable to the firm’s creditors and lenders. Current Liabilities are to be paid within a period of one year or within the standard operating cycle, whichever is shorter. They are typically settled using the firm’s current assets. Examples: Accounts payable, short-term debts like commercial paper, current maturity of long-term loans, income tax due for the year, etc.

Current Assets are often used to settle Current Liabilities, it is important for an enterprise to properly manage and pay its recurring payments and liabilities timely as it provides information regarding the company’s financial well-being and liquidity status. Investors and creditors thoroughly examine the company’s current liabilities to assess the risks and advantages associated with any business, for an enterprise with a healthy financial well being there will be a timely payment of current liabilities which ensures proper functioning of business operations for example timely payment to workers, timely payment to supplier of raw materials – as this will ensure that there is smooth production.

Components of Current Liabilities

1. Notes Payable: They represent a written promise by an enterprise to repay the creditor on some future agreed date. These notes typically include a due date for repayment, and those within one year qualify as current liabilities.

2. Accounts Payable: The monetary debts that an enterprise owes to its suppliers or creditors for products or services it has received.

3. Short-term Loans: Loans that a business must repay within one year. This category can also include business lines of credit, unsecured short-term loans or bank overdrafts due within a year.

4. Accrued Expenses: Items that a business recognises as expenses on its balance sheet but has not yet paid them. Once the business pays these expenses, they move out of the liability portion of the balance sheet. These items often represent recurring expenses, such as rent, salaries and wages and utility payments.

5. Unearned Revenue: Unearned revenue represents money a business received from customers before providing them its goods or services.

6. Current Portions of Long-term Debts: Current portions of long-term debts represent the amount of a long-term loan that a business must repay within a year. For example, a business may have a loan worth ₹6,00,000 and ₹1,00,000 is due within one year. That ₹1,00,000 represents a current liability.

7. Other Debts/Payables: Other debts/payables represent any other short-term liabilities that a business must pay within a year that do not fit in the above categories. Some examples of other debts include credit card debts, income taxes payable and salaries payable.

Formula of Current Liabilities

Current Liabilities = Notes Payable + Accounts Payable + Accrued Expenses + Unearned Revenue + Current Portion of Long-term Debt + Other Short-term Debt

Current Liabilities for any year include all those financial obligations which are required to be paid within a period of 12 months or within the normal operation cycle i.e. cash conversion cycle. Hence, to calculate Current Liabilities, first of all, an enterprise shall segregate all its liabilities between Current and Non-current Liability and then add the individual balance of Current liabilities.

Example:

Financial Statements of GFG Pvt Ltd. reveal the following balances :

Cash and cash equivalent = ₹5,000

Creditors = ₹24,200

Tax Payable = ₹8,800

Statutory Dues = ₹12,400

Unearned Revenue = ₹16,000

Rent Payable = ₹4,900

Salary Payable = ₹18,760

Short-term loan and advances = ₹30,250

Long term loan = ₹85,850

other short term debts = ₹13,280

Bills Payables: ₹11,660

You are required to calculate the Current Liabilities of GFG Pvt Ltd.

Solution:

Current Liabilities = Notes Payable + Accounts Payable + Accrued Expenses + Unearned Revenue + Current Portion of Long-term Debt + Other Short-term Debt.

Current Liabilities = 24,200 + 8,800 + 12,400 + 16,000 + 4,900 + 18,760 + 30,250, + 13,280 + 11,660

Current Liabilities = ₹1,40,250

How Current Liabilities are shown in the Balance Sheet?