Short definition: Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle.
Explanation: These liabilities are typically settled using current assets, which are assets expected to be converted to cash or used up within the same timeframe. Current liabilities are essential to track as they indicate the amount of cash a company needs to have on hand to meet its short-term financial commitments.
Example: Common examples of current liabilities include:
- Accounts payable: Money owed to suppliers for goods or services purchased on credit.
- Short-term debt: Loans or other debt obligations due within one year.
- Accrued expenses: Expenses that have been incurred but not yet paid, such as salaries or interest payable.
- Income taxes payable: Taxes owed to the government on a company’s current earnings.
Additional information (optional): Monitoring the ratio of current assets to current liabilities (known as the current ratio) can provide insights into a company’s liquidity and ability to meet its short-term obligations.