What is current liabilities?

Definition

Current liabilities are the debts you expect to pay within one year. They live as a group of accounts on the Balance Sheet, not as one line.

The group includes accounts payable, credit cards, payroll taxes payable, and accrued expenses. It also includes the current portion of long-term debt and unearned revenue that is due within a year.

On the books, each of these is a liability, not an expense. The related cost, or the inventory, was recorded when you received the goods, the labor, or the bill.

If you keep books on the cash basis, you typically record many costs only when you pay. A credit card balance or payroll tax withheld from a paycheck can still appear as an unpaid amount.

On the accrual basis, you record the owe when it arises, even if cash has not left the bank.

Where it shows up

Balance Sheet: Located below assets and above long-term liabilities.

P&L: Related to costs that have been incurred, but not paid.

Cash flow: Decreases in this section, reported cash from operating activities decreases.

See also: Liabilities · Accounts Payable · Working Capital

When you look at your Balance Sheet, current liabilities sit in their own section, below assets and above long-term liabilities. The section total is the sum of every short-term debt line listed there.

When current liabilities are high, it usually means more bills, card charges, or taxes are coming due soon. When they are low, it usually means you have paid those short-term amounts down.

The profit and loss statement does not list this section. Related costs already hit the P&L when they were incurred.

On the Statement of Cash Flows, the payment is the event that matters. Cash goes down when you settle a current liability, and that liability balance goes down with it.

How it works

A current liability gets onto the books when you owe something due within a year. Buying on vendor credit, charging a card, running payroll, or taking a customer deposit can all raise the total.

Accounts payable is unpaid vendor invoices. Credit cards are purchases you charged and have not paid the card company yet.

Payroll taxes payable is tax you withheld from paychecks, plus any employer share you still owe. Accrued expenses are amounts you know you owe even though the invoice has not arrived.

The current portion of long-term debt is the principal on a longer loan that is due in the next twelve months. The rest of that loan stays in long-term liabilities.

Unearned revenue is money a customer paid you before you did the work. If you owe that work within a year, the remaining deposit sits in current liabilities until you deliver.

When you pay, the liability for that item drops. Cash falls by the same amount, unless you settle one current liability by raising another, such as paying a vendor bill with a credit card.

On cash-basis books, some of these lines never appear. You record the cost at payment.

Example

A neighborhood bakery buys $800 of flour on account from a mill. The mill delivers on Monday and emails an invoice due in 30 days.

The bakery records:

Debit: Inventory $800

Credit: Accounts payable $800

Inventory (an asset) and accounts payable (a current liability) both go up by $800. Cash has not moved.

The Balance Sheet is larger on both sides. The Income Statement has not changed yet, because the flour is still on the shelf.

Thirty days later the bakery pays the mill:

Debit: Accounts payable $800

Credit: Cash $800

Accounts payable for that bill falls back to zero, and cash falls by $800. Current liabilities drop by the same $800.

Common mix-ups

Current liabilities are not the same thing as accounts payable. AP is one line inside the current liabilities section.

Credit cards, payroll taxes payable, accrued expenses, and the current slice of a loan sit in that section too. If you treat AP as the whole category, you will miss other debts that are also due this year.

Current liabilities are not long-term liabilities. A five-year equipment loan is long-term, except for the principal due in the next twelve months, which belongs in current liabilities.

Liabilities are not expenses. Recording a bill or an accrual raises a liability; the related expense, or inventory, was recorded when you incurred the cost.

Paying later only settles the owe. It does not create a second expense.

Related terms

• Liabilities: Everything the business owes to lenders, vendors, employees, and customers.
• Accounts Payable: Amounts the business owes vendors for goods or services already received.
• Accrued Liabilities: Expenses incurred but not yet billed or paid at period end.
• Deferred Revenue: Cash collected from customers before the work is delivered.
• Current Portion Of Long-Term Debt: The slice of loan principal due within the next twelve months.
• Current Ratio: Current assets divided by current liabilities.
• Working Capital: Current assets minus current liabilities, showing short-term operating cushion.
• Credit Card Payable: The balance owed on company credit cards at period end.