Definition Definition

Current Liabilities: Understanding Current Liabilities Formula with Example

What are Current Liabilities?

Current Liabilities are obligations that a company expects to pay out of existing assets within the coming year. Within the current liabilities section, companies usually list notes payable first, followed by accounts payable.

Understanding Current Liabilities

Common examples are notes payable, accounts payable, wages payable, bank loans payable, interest payable, and taxes payable. Also included as current liabilities are current maturities of long-term obligations- payments to be made within the next year on long-term obligations.

It is a debt that a company can reasonably expect to pay -

  1. From existing current assets or through the creation of other current liabilities, and 
  2. Within one year or the operating cycle, whichever is longer.

Debts that do not meet both criteria are classified as long-term liabilities. Most companies pay current liabilities within one year out of current assets, rather than by creating other liabilities.

Current liabilities are displayed next to assets on the right-hand side of a financial statement. In most cases, businesses will get a list of several categories of current liabilities along with the loan balance for each one. The overall sum will then reveal all of the current liabilities.

A company's one of the most important objective is to meet current liabilities. A firm's success depends on balancing liabilities and current assets. The difference represents the operating capital of the business.

You may get a picture of a firm’s profitability by making comparisons of liabilities against current assets. If the company's assets are insufficient to cover short-term commitments, it may face financial difficulties before the year's closing.

The Formula

The formula is current liabilities is simple; just add all the liabilities -


Current Liabilities = Trade Payables + Short Term Loans + Notes Payable + Accrued Expenses + Prepaid Revenues + Other Sort Term Debts

Practical Example

A company named Jk Limited is known for its leather products. The firm is doing well for some years as they were able to meet its current liabilities on a regular basis. Current liabilities are basically short-term debts that should be paid within a year. Last year the company had $500 notes payable, $200 accrued expenses, $100 trade payable and other short-term debts for $200. 

The total current liabilities of Jk Limited were-

$500 + $200 + $100 + $200

= $1000

In Sentences

  • A firm's current liabilities are short-term debts that are normally due within a year.
  • The money earned by a business’s financial operations is used to pay current liabilities, which are indicated on the balance sheet.


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