Current liability: Basics and definition

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What is current liability?

The current liability is the company’s financial obligation that must be met or paid in one year or in a normal operating cycle, according to AccountTools and Investopedia. Current liabilities are reported on the balance sheet and since they are due in a very short time; companies must have enough liquidity to meet these demands.

The current operating cycle of a company is the time it takes from acquiring inventory to converting it into cash.

The duration of the operating cycle is usually one year. If the operating cycle is more than one year, accounts payable obligations must be met based on the terms of the cycle.

Companies without enough liquidity to cover their current liabilities do not look good in the eyes of investors.

Example of current liabilities

Current liabilities come in many forms and sizes. The following are a few examples of current liabilities.

Income tax payable: This is the business tax liability that a business owes the government

Bills payable: These are liability documents that show the debt an individual or organization owes another organization. For example, this could be the money a bank owes to another bank.

Accounts payable: Accounts payable are payment obligations such as the invoices from the supplier

Accrued expenses: These are liabilities that have not been paid yet during an accounting period

Short term loans: Short term loans are loans that are due within a year.

Are current liabilities bad for a business?

Liabilities are not always bad for business. Everything depends on whether the company can cover these obligations and the interest associated with them.

For example, if a business has accumulated a lot of current liabilities with a lot of interests, it could be difficult to pay them off. On the other hand, the company could be in good hands as long as it has current assets to cover those liabilities.