Current liabilities are liabilities of a company, which in accounting have to be settled within twelve months or within a normal operating cycle. An organization’s operational cycle, also known as the cash conversion cycle, is the period of time it takes to buy inventory and turn that inventory into cash through sales. Items that come under current liabilities
- Account payables
- Unearned revenue
- Short term provisions
- Trade creditors
- Short term borrowings
- Other current liabilities
- Dividends payable
- Accrued expenses
- Taxes payable
How are current liabilities paid off?
Current liabilities are usually paid off by using the current assets such as cash or cash equivalents or by liquidating inventory. They can also be paid off by transferring the bills receivable to the creditor. One way to pay them off is also by creating a short term obligation.
Accounting of current liabilities
Current Liabilities comes under the broad head of Equity and Liabilities. They usually help to know the liquidity position of the company as well as to determine whether the company has sufficient amount to pay off its short term obligations.
Two major ratios that are calculated with the help of current liabilities are the Current Ratio and Quick Ratio. An ideal current ratio is 2:1, and the ideal quick ratio is 1:1. These ratios should not be high as it shows that the company has not used its assets judiciously so as to generate returns i.e., under-utilization of assets.
Examples of Current liabilities
- Suppose an inventory of Rs 50000 is being taken on credit from XYZ Co., and a bill has been drawn in favor of XYZ Co., which expires in 90 days. Such bills payable come under current liability
- A loan that was taken in 2014 and is due to be paid in 2019. It will be a current liability for the year 2019