What are Current Liabilities?

Current liabilities are like pieces of fried chicken that need your attention right away…

When frying chicken, some pieces of chicken will cook faster than others. You’ll need to pay more attention to pieces of chicken that are closer to being done. If left unattended, those pieces may get burnt — or worse, start a fire. Likewise, current liabilities are debts that need your attention sooner because they’re due sooner than long-term liabilities.

Current liabilities are debts that a company must repay in full within the next 12 months. Also referred to as short-term liabilities, current liabilities represent a future financial obligation that will be due soon. Current liabilities are different from long-term liabilities because long-term liabilities are due in more than a year. For this reason, long-term liabilities are also known as non-current liabilities.

A company typically keeps track of the dollar value of its current liabilities on its balance sheet, listing current liabilities before long-term liabilities. Some examples of current liabilities are accounts payable, unearned revenue (customer prepayments for future delivery of goods or services), notes payable, accrued payroll and benefits, accounts payable, and taxes payable.

Company stakeholders often use current liabilities with current assets — resources that a company can reasonably expect to turn into cash within one year — and other items on the balance sheet to evaluate a company in a variety of ways.

The most common use of current liabilities for financial analysis is the calculation of a company’s liquidity — a company’s ability to meet its current liabilities with current assets on hand.

The main difference between current liabilities and non-current liabilities (aka long-term debt) is the time that a company has to pay back the debt. While a company has up to one year to pay current liabilities, the company has more than one year to settle long-term liabilities.

Another difference is the accounting treatment of current liabilities and non-current liabilities on the balance sheet. A company lists liabilities on the balance sheet by putting first those due within a year (current liabilities) and second those due in over a year (non-current or long-term liabilities).

However, the current portion of non-current liabilities is included in the current liabilities section of the balance sheet — or example, the current year’s portion of a 10-year operating lease liability (a contract that grants you use of an asset but no ownership rights to the asset) or the current year’s portion of a five-year car loan would be recorded under current liabilities.

Current liabilities are the company’s financial obligations due within a year (like notes payable, accrued wages, and accounts payable). In contrast, current assets are the company’s resources that can be reasonably turned into cash within a year (like notes receivable, inventories, and short-term investments).

Let’s review the difference between current liabilities and current assets using notes payable and notes receivable.

• Notes payable is a current liability that records a loan that the company needs to pay back to another party. Unlike accounts payable, this loan isn’t related to the sale of goods or services. The company has to pay back the loan within a year.
• Notes receivable is a current asset that tracks money that the company lent to another party for something other than the sale of goods or services. The company expects to receive cash within a year.

A similarity between current liabilities and current assets is that the company expects cash flows within a year: outgoing cash flows with current liabilities and incoming cash flows with current assets.

Companies record current liabilities on a balance sheet, according to the industry the companies work in. Let’s review some examples of current liabilities that you would find on a company’s balance sheet.

A company records any purchase from a vendor on credit as an accounts payable in the company’s balance sheet.

A short-term loan that a company extends to another company or individual. It often involves the signature of a note (document) that certifies the promise of the borrower to pay back to the lender.

Sometimes the company incurs expenses for which it doesn’t pay right away. Some examples are bills for the use of utilities and preparation of income taxes. In accrual accounting, a company keeps track of expenses and revenue in the same period that they occur, regardless of whether cash exchanged hands. An accrued liability records the amount that the company owes for those expenses.

A specific type of accrued liability that tracks the money that the company owes its employees for salaries, wages, and benefits. Companies that pay employees on a bi-weekly or monthly basis typically need to keep track of accrued payroll and benefits.

Money that a company owes for applicable income taxes at the federal, state, or local level.

An operating lease is a contract that grants you the right to use an asset (like manufacturing equipment or real estate) that you don’t own and that lasts several years. The current portion of an operating lease liability is money that you owe for that contract due within a year.

Deferred revenue is a client’s advanced payment for goods or services so that a company delivers those goods or services in the future. The advance is a financial obligation of the company to the client and appears as a liability on the balance sheet. The current portion of deferred revenue records the value of the goods or services that the company has to deliver within a year.

A company offering gift cards accepts pre-payment from customers without delivering goods or services. A store value card liability is just a fancy accounting term for gift cards and is a common balance sheet item for a wide variety of retailers.

The portion of a multi-year financial obligation (long-term debt) that a company has to pay within a year.

You can find current liabilities at the top of the liabilities section of a company’s balance sheet — a snapshot of a company’s financial position at a point in time.

Following generally accepted accounting principles (GAAP) — a commonly followed collection of guidelines for financial reporting — a company lists its current liabilities before long-term liabilities on a balance sheet.

One of the main uses of current liabilities is to sustain the operations of a company. If a company could only use its cash on hand to buy inventory, hire staff, secure utilities, and perform other activities, then the company would generally be very limited in what it could achieve.

By being able to take on short-term debts (like buying inventory on credit due in 45 days or paying employee wages in two weeks), a company is able to run its operations without spending cash right away.

Another use of current liabilities is to evaluate a company’s liquidity — a company’s ability to meet its current liabilities with current assets.

Company owners, financial analysts, investors, creditors, and other company stakeholders often use financial ratios involving current liabilities to measure a company’s liquidity.

Three common financial ratios using current liabilities to measure liquidity are:

Current Ratio = Current Assets / Current Liabilities

The current ratio measures the ability of a company to pay its existing debts with its current assets.

Quick Ratio = (Cash + Short-term Marketable Investments + Receivables) / Current Liabilities

The quick ratio is a more strict liquidity ratio than the current ratio because the quick ratio only considers the most liquid assets to pay debts owed within a year.

Cash Ratio = (Cash + Short-term Marketable Investments) / Current Liabilities

The cash ratio measures the liquidity of a company during a crisis scenario — where there are no more cash inflows.

The formula to calculate total current liabilities is:

Total current liabilities = Accounts Payable + Notes Payable + Accrued Liabilities + Deferred Revenue + Short-term Debt + Current Portion of Long-term Debt + Other Current Liabilities

Let’s use this formula to calculate Tesla’s current liabilities for the quarter that ended Jun. 30, 2022:

Accounts payable: $11.21B Accrued liabilities and other: $6.03B Deferred revenue: $1.85B Customer deposits: $1.18B Current portion of debt and finance leases: $1.53B Total current liabilities: $21.82B

(Source: Tesla Quarterly Reports)

Tesla had over $21.82B in current liabilities for the quarter that ended Jun. 30, 2022.

Companies record current liabilities on their balance sheets. Depending on their industry, some companies may not record some items from the total current liabilities formula.