What are Current Liabilities?
refer to short term debt obligations of a company, to its creditors and suppliers, which are due within 1 year. They are listed as an item on the balance sheet
as a part of total liabilities and is broken out by the following categories: short term debt, accounts payable
, accrued benefits, and other current liabilities. Current liabilities is heavily scrutinized by investors through the current ratio
and quick ratio which provides insight into the companies ability to repay their short term liabilities.
Short Term Debt
Short term debt is typically taken through the issuance of short term notes to investors through direct issuance or through bank loans that have been taken. Short term debt is also referred to as notes payable. Investors will analyze short term debt to understand how it is being utilized. For example, if a company is using short term debt to take advantage of an opportune time and generate more profits, it will be more favorably looked at versus a company who is taking out debt to pay their employees. Investors will compare the amount of short term debt to the cash position with in current assets to determine if the company is in strong financial standing or not. As long as the cash position is significantly greater, there is typically not much to be worried about.
The A/P portion of the balance sheet consists of IOU's or unpaid debt to vendors or suppliers. It is the opposite of account receivable
which refers to the amount of money that is owed to the company.
Accrued expenses are expenses which have been incurred but not yet recorded. This includes salaries, bonuses, employee stock options, income taxes, and other expenses which will have been incurred, but not yet invoiced. A balance sheet which does not included accrued expenses is one that understates the companies total liabilities position.
Other Current Liabilities
This section lumps together all short term liabilities which have not been included in the prior 3 sections we discussed above. Every company will list different items in this account and the details of the contents can be found in the small print somewhere in the footnotes.