Current Liabilities

Current Liabilities: Definition, Examples, and How to Calculate Them

What are current liabilities?

Current liabilities are a company’s short-term financial obligations due within one year or within its normal operating cycle (whichever is longer). They are typically settled using current assets such as cash or accounts receivable. Common purposes include funding operations, paying suppliers, and meeting short-term commitments.

Common types of current liabilities

• Accounts payable (unpaid supplier invoices)
• Short-term debt (bank loans, commercial paper)
• Current portion of long-term debt (maturities due within one year)
• Notes payable (principal due within one year)
• Dividends payable
• Deferred revenue (the portion expected to be earned within one year)
• Interest payable
• Income taxes payable
• Other current liabilities (catch-all for miscellaneous short-term obligations)

How to calculate total current liabilities

Add up the balances of all current liability accounts on the balance sheet:
Total current liabilities = Sum of all the line items listed under current liabilities

Key liquidity ratios

• Current ratio = Current assets / Current liabilities
• Measures ability to meet short-term obligations using all current assets. A ratio above 1 generally indicates the company has more current assets than current liabilities.
• Quick ratio (acid-test) = (Current assets − Inventory) / Current liabilities
• A more conservative measure that excludes inventory (less liquid).

Interpretation notes:
– Compare ratios with industry peers—acceptable levels vary by industry.
– A very high ratio may indicate underutilized assets (excess cash or receivables).

Accounting for current liabilities (journal entry examples)

• Purchase of inventory on credit:
• Debit: Inventory
• Credit: Accounts payable
• Receipt of a service with payment due within a year:
• Debit: Expense (e.g., Audit expense)
• Credit: Other current liabilities
• Payment of a payable:
• Debit: Accounts payable (or other current liability)
• Credit: Cash

Example (simplified)

A retailer reports:
– Accounts payable: $4.4 billion (including merchandise payables and accrued liabilities)
– Short-term debt: $0.006 billion
– Taxes payable: $0.02 billion
Total current liabilities ≈ $4.4 billion

If the retailer’s current assets are $5.5 billion:
– Current ratio = 5.5 / 4.4 = 1.25
– Quick ratio (assuming inventory = $1.0 billion) = (5.5 − 1.0) / 4.4 = 1.02

Why current liabilities matter

Investors, creditors, and lenders use current liabilities and related liquidity ratios to assess short-term financial health and solvency. Timely collection of receivables and on-time payment of payables both influence credit decisions and working-capital management.

Bottom line

Current liabilities are short-term debts and obligations due within a year. They are a crucial part of working capital and liquidity analysis. Monitoring and managing current liabilities—alongside current assets—helps stakeholders evaluate a company’s ability to meet near-term obligations and maintain operational stability.