Current Liabilities

Obligations that the company must pay off within one year.

What are Current Liabilities?

Current liabilities are financial obligations of a business entity that are due and payable within a year. A liability occurs when a company has undergone a transaction that has generated an expectation for a future outflow of cash or other economic resources. The key operator in this definition is the word “expectation,” as a liability does not necessarily always have to end up resulting in an outflow of value, but must be reasonably expected to on recognition of the liability.

While a current liability is defined as a payable due within a years time, a broader definition of the term may include liabilities that are payable within one business cycle of the operating company. In other words, if a company operates a business cycle that extends beyond a years time, a current liability for said company is defined as the longer of the two periods.

Current Liabilities

 

Current liabilities are critical for modeling working capital when building a financial model. Transitively, it becomes difficult to forecast a balance sheet and the operating section of the cash flow statement, if historical information on the current liabilities of a company is missing.

Not surprisingly, a current liability will show up on the liability side of the balance sheet. In fact, as the balance sheet is often arranged in ascending order of liquidity, the current liability section will almost inevitably appear at the very top of the liability side.

 

How are current liabilities generated?

A company will always incur inevitable expenses for running its business operations and sometimes the capital and operational resources from where to get the cash to pay the bills are not enough to cover for it. As a result, credit terms and loan facilities offered by suppliers and lenders are often the solution to this shortfall. Alternatively, a company will also incur a tax payable within any operating year that it makes a profit and thus, owes a portion of this profit to the government.

There are various categories of current liabilities and the most common is the accounts payable, which arise from a purchase that has not been fully paid off yet, or where the company has recurring credit terms with its suppliers. Other current liabilities include accrued expenses, short-term notes payable, current portion of long-term notes payable, and income tax payable.

These are all important factors for forecasting and valuation.

 

Additional resources

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