Current Liabilities

  Current Liabilities

Current liabilities are the debts and obligations that the company owes that is coming due within one year. They are found on the balance sheet under the headings of Accounts Payable, Accrued Expenses, Short-Term debt, Long-Term debt coming due, and other current liabilities. Typically current liabilities are settled using current assets, which are assets that are used for one year.

 

Dive into Liquidity Ratios

 

Current assets include cash, cash equivalent, and account receivables. Which is money owned by customers. The ratio of current assets to current liabilities is an important one in determining a company's ongoing ability to pay its debts as they are due.

 

Accounts payable is typically one of the most significant current liability accounts on a company's financial statements, representing unpaid amounts for suppliers. Companies try to match payment dates so that their accounts receivables are collected before the accounts payables are due to suppliers.

 

For example, a company might have 60-day terms for money owed to their supplier, which results in requiring their customers to pay within a 30-day term. Current liabilities can also be settled by creating a new current liability, such as a new short-term debt obligation.

Financial analysts and creditors often use the current ratio. This current ratio measures a company's capacity to pay its short-term financial debts or obligations. The ratio, which is calculated by dividing current assets by current liabilities, shows how well a company manages its balance sheet to pay off the company’s short-term debt. It shows investors and financial analysts whether a company has enough current assets on its balance sheet to satisfy or pay off its current debt and other payables.

 

And the most important liquidity ratio is the quick ratio. The quick ratio is the same formula as the current ratio, except it subtracts the value of total inventories beforehand. The quick ratio is a more conservative one for liquidity since it only includes the current assets that can be immediately converted to cash to pay off current liabilities.

 

A number higher than one is ideal for both the current and quick ratios since it demonstrates there are more current assets to pay current short-term debts. However, if the number is too high, it could mean the company is not leveraging its assets as well as it otherwise could be.