Current Liabilities Examples and Calculation (Exam-Oriented)
Current Liabilities are a fundamental topic in accounting and financial analysis. They represent a company’s short-term financial obligations that are due and payable within one year. Understanding current liabilities is essential for students and anyone analyzing the liquidity and health of a business.
Understanding Current Liabilities
Current liabilities refer to amounts a business owes that must be settled within the next twelve months. These obligations commonly arise from everyday business transactions. Typical current liabilities include payments to suppliers, wages owed to employees, interest on loans, various taxes, and other similar short-term debts.
On a company’s balance sheet, current liabilities are listed under the liabilities section. They are typically paid off using the company’s current assets or revenue generated from core business activities.
Examples of Current Liabilities
The following are common examples of current liabilities:
- Accounts payable: Money owed to suppliers for goods or services bought on credit.
- Accrued expenses: Costs like unpaid salaries, wages, utilities, or rent, which have been incurred but not yet paid.
- Short-term debt: Borrowings like bank loans or commercial paper due within a year.
- Interest payable: Unpaid interest on borrowings.
- Income taxes payable: Taxes owed to the government but not paid as of the reporting date.
- Payroll taxes: Employer liabilities for withheld taxes owed to authorities.
- Sales taxes payable: Taxes collected from customers meant to be remitted to government.
- Dividends payable: Amounts declared as dividends to shareholders, payable soon.
- Utilities payable: Unpaid electricity, water, and gas bills.
- Warranty obligations: Amounts estimated for warranty service expected within the next period.
- Other short-term obligations: Rental fees, commissions, bonuses, and other similar debts.
Key Features and How They Work
Current liabilities are settled either by using current assets such as cash, inventory, or receivables, or by creating other short-term liabilities. For example, if a company owes suppliers and has inventory on hand, it may sell the inventory and use the cash to pay suppliers.
It is important for a business to manage current liabilities responsibly so that it maintains trust with lenders, vendors, and employees. Failing to meet these obligations can affect a company’s financial stability and reputation.
Illustrative Table: Common Current Liabilities
| Type | Description | Example |
|---|---|---|
| Accounts Payable | Unpaid bills to vendors or suppliers | Payment to a raw materials supplier |
| Accrued Expenses | Incurred but unpaid costs | Outstanding salaries for employees |
| Short-term Debt | Borrowings due within a year | Bank loan maturing in six months |
| Interest Payable | Owed interest not yet paid | Quarterly interest on a company loan |
| Taxes Payable | Unpaid tax obligations | Pending income tax or GST payments |
| Dividends Payable | Declared dividends not yet paid | Dividends for shareholders declared but pending payment |
| Payroll Liabilities | Unpaid employee-related liabilities | Withheld payroll taxes due to government |
Step-by-Step: Calculating the Current Ratio
The current ratio is a simple but important formula used to evaluate a firm’s liquidity:
If the ratio is above 1.0, the company is generally considered to have enough resources to pay off its short-term debts. For example, if current assets are ₹150,000 and current liabilities are ₹100,000:
This means the company has ₹1.50 in assets for every ₹1.00 of current liabilities.
Real-World Example
Imagine a leading technology company reports the following liabilities and assets:
- Accounts payable: ₹69,000 crore
- Short-term debt (commercial paper): ₹9,970 crore
- Current portion of long-term debt due in the next year: ₹10,900 crore
- Total current liabilities: ₹176,400 crore
- Total current assets: ₹152,987 crore
If the company's current liabilities are greater than its current assets, it may face challenges in covering its short-term obligations. Such analysis is closely watched by investors, lenders, and analysts.
Why Current Liabilities Matter
Current liabilities provide insight into a company’s short-term financial health. Investors and banks study them to assess whether a company is managing its payables on time and maintaining liquidity. Efficient management of current liabilities helps a business avoid unnecessary borrowing or penalties.
Delayed payments of current obligations can harm business relationships and impact creditworthiness.
Practical Applications and Next Steps
Practice identifying and categorizing different current liabilities from a sample balance sheet. Calculate the current ratio using provided numbers and interpret the result. Consider how changes in current liabilities influence liquidity and working capital decisions.
- Review balance sheet formats to see where current liabilities are presented.
- Check your knowledge by preparing a list of all current liabilities likely to be found in a fast-growing business.
- Analyze how increasing or decreasing a specific current liability could affect a company’s financial stability.
Summary
Mastering current liabilities helps you evaluate an organization’s liquidity, identify potential risks, and make better accounting and financial decisions. Use examples, formulas, and practice questions to deepen your understanding of how short-term obligations impact business performance.
FAQs on What Are Current Liabilities? Complete Guide for Commerce Students
1. What are current liabilities?
Current liabilities are a company's short-term financial obligations that are due to be paid within one year. They include items such as accounts payables, accrued expenses, short-term loans, taxes payable, dividends payable, and other short-term debts. These are listed on the balance sheet and play a crucial role in liquidity analysis and day-to-day financial management.
2. What is included in current liabilities?
Current liabilities typically include the following:
- Accounts payable (sundry creditors)
- Bills payable
- Outstanding expenses (e.g., wages, rent, salaries)
- Short-term loans (due within a year)
- Bank overdraft
- Taxes payable
- Dividends payable
- Customer advances and deposits
- Current portion of long-term debt
- Other payables due within 12 months
3. Are provisions current liabilities?
Yes, provisions can be current liabilities if they are expected to be settled within one year. For example, a provision for employee benefits due within the next year or a provision for taxes is classified as a current liability on the balance sheet.
4. How are current liabilities shown in the balance sheet?
Current liabilities are listed under the ‘Liabilities’ section of the balance sheet, typically after current assets. They are usually presented in a grouping that may include trade payables, short-term borrowings, and other current obligations, arranged according to their due dates as per Companies Act Schedule III or other official guidelines.
5. What is the current liabilities formula?
The formula for total current liabilities is:
Current Liabilities = Sundry Creditors + Bills Payable + Outstanding Expenses + Short-term Loans + Bank Overdraft + Other Dues Payable Within 1 Year
This formula helps in calculating the total current obligations of a business as per the official syllabus.
6. What is the difference between current and non-current liabilities?
Current liabilities are debts that must be paid within one year, such as creditors, bills payable, and short-term loans. Non-current liabilities are obligations due after more than one year, like debentures, long-term loans, and bonds.
Key difference: Time period for repayment and impact on liquidity versus solvency.
7. What are some common examples of current liabilities?
Some common examples of current liabilities include:
- Accounts payable (Trade creditors)
- Bills payable
- Outstanding salaries and wages
- Bank overdraft
- Short-term loans
- Accrued interest and expenses
- GST payable
- Advance received from customers
- Current portion of long-term debt
- Dividends payable
8. How are current liabilities important for liquidity analysis?
Current liabilities are essential for liquidity analysis as they show the company’s short-term obligations. When compared with current assets using ratios like the current ratio (Current Assets / Current Liabilities), they help determine whether a business can meet its short-term debts as they become due.
9. How do accounts payable differ from other current liabilities?
Accounts payable (trade payables) are amounts owed by a company to suppliers for goods or services purchased on credit and are a key current liability. Other current liabilities may include outstanding expenses, taxes payable, or short-term loan obligations. Accounts payable specifically refer to supplier/vendor invoices yet to be paid.
10. Can you list 5 current liabilities and 5 non-current liabilities?
Yes, here are examples:
Current Liabilities:
- Sundry creditors
- Outstanding salaries
- Bank overdraft
- Bills payable
- Accrued interest
- Debentures
- Long-term loans
- Public deposits (payable after 1 year)
- Deferred tax liabilities
- Bonds payable (due after 12 months)
11. How do you calculate the current ratio using current liabilities?
The current ratio is a liquidity metric calculated as:
Current Ratio = Current Assets / Current Liabilities
This ratio shows a company’s ability to pay its short-term obligations using its short-term assets. A ratio above 1 indicates good short-term financial health.
12. Why are current liabilities important for investors?
Current liabilities are important for investors because they indicate a company’s short-term financial health and liquidity risk. By analyzing current liabilities in relation to current assets, investors and creditors assess the business’s ability to meet its immediate obligations and ensure reliable cash flow management.
