Current liabilities are a balance sheet item that include accounts payable, taxes payable, dividends payable, accrued expenses, unearned revenue, and other obligations that must be paid within a year.

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Table of ContentsWhat are Current Liabilities?Current Liabilities DefinitionCurrent Liabilities ExamplesLong-Term Liabilities vs. Current LiabilitiesCurrent Assets vs. Current LiabilitiesLiquidity RatiosFinal Thoughts
Current liabilities are short-term debt and obligations that must be repaid within one year. The most common current liabilities are accounts payable, wages payable, taxes payables, interest payable, accrued expenses, and short-term loans.
Current liabilities are a liability account on a company’s balance sheet and often compared against the current assets account, a list of short-term assets. Current liabilities are generated when you accept products or services from a vendor or supplier, but do not pay cash.
For instance, an ecommerce clothing store receives $30,000 of inventory and their supplier extends 30 day payment terms. For the 30-day period, the ecommerce company would have a $30,000 accounts payable balance (a current liability) and the supplier would have a $30,000 accounts receivable balance (a current asset).
This post walks through the definition of current liabilities, examples of current liabilities, the differences between current and long-term liabilities, and how to calculate liquidity ratios such as current ratio, quick ratio, and cash ratio.
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Current Liabilities Definition

The current liabilities section of the balance sheet show financial obligations that must be repaid within the operating cycle of the business. While the operating cycles vary per company, most have an operating cycle of one year.

Suppliers and vendors often extend credit to businesses who purchase their goods and services, which is called accounts payable. People and companies that extend credit to a company are called creditors.

Most payment terms are 30-90 days. For smaller invoices, it is normal for the terms to be shorter. For larger invoices, the terms are typically longer.

Both the company extending credit and the company buying on credit need to be careful to monitor their cash flow in situations when large purchases on long payment terms.

Moreover, the timing when expenses are incurred and paid out are not the same. A current liability balance is created due to this timing mismatch.

For instance, when you owe employees their salaries but have not paid them yet (salaries payable), when you owe your federal and state income taxes but have not paid them yet (taxes payable), and when customers pay you but you have yet to perform the services (unearned revenue).

The current liabilities formula is the sum of all current liability accounts. For example:

Current Liabilities = Accounts Payable + Salaries Payable + Taxes Payable + Interest Payable + Accrued Expenses + Unearned Revenue + Short-Term Loans

A business could have more or less accounts than listed in the formula above, but the same logic applies. Total current liabilities is the sum of all current liability accounts.


In addition, there is a special treatment for long-term financial obligations that have payments within the current operating cycle. Specifically, the portion of long-term debt due within the year is considered a current liability while the portion that falls outside of one year is considered a long-term liability.

Here is a list of common current liabilities:

Accounts payableCredit cards payableSalaries payableWages payableTaxes payableInterest payableDividends payableAccrued expensesUnearned revenueShort-term loans
Accounts payable refers to how much money the company owes to vendors, suppliers, and other creditors. This account is also called trades payable.

Credit cards payable refers to the amount owed to credit card companies. Most businesses spend on credit cards so they can keep more cash on hand in the month. This liability account shows how much is owed to all business credit cards.

Salaries payable refers to the amount of salary that you owe your employees. This account increases every pay period and is decreased by salaries expense (when you actually provide payments to salaried employees).

Wages payable is similar to salaries payable, but is for hourly wages earned.

Taxes payable refers to all tax bills that the company has received but not paid yet. There may be several subaccounts, such as federal income taxes payable, state income taxes payable, and sales taxes payable.

Interest payable refers to the interest payments that must be made within the current operating cycle. As mentioned above, the current portion of long-term debt (principal + interest due within one year) is counted towards current liabilities.

Dividends payable refers to dividends that have been declared by a company’s board of directors but have yet to be paid to shareholders. Because the promise has been made but the cash has not been paid, a current liability account is created.

Taxes payable refers to all tax bills that the company has received but not paid yet. There may be several subaccounts, such as federal income taxes payable, state income taxes payable, and sales taxes payable.

Accrued expenses refers to all goods and services that have been received but not paid for. This is a liability account because the company is liable to provide payment.

Unearned revenue refers to cash that has been collected from customers but the services have not been performed. This is a liability account because the company is liable to perform the services. This account is also called customer deposits.

Short-term loans refer to debt that is due within one year. Examples include bank loans, bank notes, lines of credit, and more. This account is also called notes payable.

For most companies, accounts payable (also called trade payables) is usually one of the largest current liability accounts on their financial statements.

Current Liabilities Examples

In this example, Company A received $15,000 of inventory and plans to pay on credit. The supplier extended 30-day payment terms. We are looking at the journal entry to record this transaction and two snapshots of their balance sheet.

Balance Sheet Before Transaction

Cash: $100,000

Accounts Receivable: $50,000

Inventory: $200,000

Total Current Assets: $350,000

Accounts Payable: $100,000

Notes Payable: $75,000

Total Current Assets: $175,000

Journal Entry

Dr 15,000 inventory

Cr 15,000 accounts payable

Balance Sheet After Transaction

Cash: $100,000

Accounts Receivable: $50,000

Inventory: $215,000

Total Current Assets: $365,000

Accounts Payable: $115,000

Notes Payable: $75,000

Total Current Assets: $190,000

Cash was not affected by this transaction because the inventory was not paid for at this time. Inventory increased by $15,000 and accounts payable, on the other side of the balance sheet, increased by $15,000 as well. Total current liabilities also increased from $175,000 to $190,000.


Remember that current assets does not have to equal current liabilities. Instead, total assets must equal total liabilities + owners’ equity.

Long-Term Liabilities vs. Current Liabilities

In accounting, liabilities are financial obligations that you must pay and assets are resources that will generate value.

Current liabilities include debt and other obligations that must be repaid within the business’s operating cycle, which is usually one year. Long-term liabilities refers to all debt and obligations that are due more than one year from now.

Debt that spans across over multiple fiscal years, like bank loans and mortgages, are reported as long-term liabilities. But, the portion of principal and interest due within one year from today are included in current liabilities.

In business, it is important to properly manage your short-term financial obligations. The best way to cover obligations is through profit generated by the business. Even a company with a large cash position could have a poor capital structure, if they are ladened with high levels of debt at high interest rates.

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Current Assets vs. Current Liabilities

Current assets are short-term assets that will be used to generate value or convert to cash. A handful of examples include cash, cash equivalents, marketable securities, inventory, and accounts receivable.


On the other hand, current liabilities are short-term obligations that need to be paid soon. As a general rule, current liabilities are paid off using current assets. Businesses of all types, from small online stores to massive multi-national corporations, need to balance the level of short-term assets to short-term liabilities.

The accounting metrics in the next section provide easy ways to track this relationship and help operators spot trends in the data. We suggest that teams track liquidity ratios every 2-4 weeks and have at least monthly meetings about their near-term assets and liabilities.

Liquidity Ratios


Liquidity ratios are a group of accounting metrics that measure a company’s ability to meet their short-term obligations. They are similar to solvency ratios which are accounting metrics that show a company’s ability to meet long-term obligations.
The current ratio is current assets divided by current liabilities. The number highlights if a company can cover its short-term liabilities by looking at all the short-term assets available. The formula is:
The quick ratio is cash plus cash equivalents divided by current liabilities. The numerator is also called quick assets, hence the name of the formula. The number shows if the company has enough cash and cash equivalents to cover all near-term liabilities. The formula is:
The cash ratio is cash divided by current liabilities. The result is a strict look at if a company has enough cash on hand to cover its short-term liabilities. The formula is:

Cash Ratio = Cash / Current Liabilities

Keep in mind that the current ratio is the most generous since it includes the most assets, the cash ratio is the most strict, and the quick ratio is in the middle.


It’s important to note that all of these values are found on the balance sheet, not the income statement or cash flow statement.

Final Thoughts

Current liabilities are short-term debt and obligations that must be covered within the normal operating cycle of a business, which is one fiscal year for most companies.


Examples of current liabilities include: accounts payable, credit cards payable, taxes payable, interest payable, dividends payable, notes payable, accrued expenses, and unearned revenue.

The accounting metrics in the next section provide easy ways to track this relationship and help operators spot trends in the data. We suggest that teams track liquidity ratios every 2-4 weeks and have at least monthly meetings about their near-term assets and liabilities.

Executives, managers, shareholders, financial analysts, and lenders all look to current liabilities as an indication of the financial health. If the current liabilities balance is too high, that reflects poorly on a company’s ability to generate enough resources to cover its obligations.

Balancing short-term assets and short-term liabilities is one of the core aspects of business operations. As such, we recommend that operators update their liquidity ratios every 2-4 weeks and share the results with key executives and employees.

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The accounting metrics in the next section provide easy ways to track this relationship and help operators spot trends in the data. We suggest that teams track liquidity ratios every 2-4 weeks and have at least monthly meetings about their near-term assets and liabilities.