Understanding Current Liabilities
The term “liabilities” probably sounds quite familiar to most business owners, and this term can sometimes be intimidating. There are two main categorisations of liabilities, which are current liabilities and non-current liabilities. Current liabilities are the financial obligation that the company should pay in a year, while non-current liabilities refer to those that will be due after a year. In this article, we will shed light on the first type, the current liabilities.
Current liabilities are the financial obligations or debts that the company owes, and it needs to pay for them in a year. In the balance sheet (Also see Components in Balance Sheet), one should record them in ascending order according to their terms, that means, from those with the shortest term to the longest term. Some of the items include short-term loans, accounts payable, bank overdraft, as well as other short-term liabilities. You do not need to worry too much if you do not know how to record these items as current liabilities in the financial statements because the professionals from the bookkeeping firms in Singapore are always ready to help. Feel free to contact them if you need any assistance in your accounting-related tasks.
The accounts payable is probably the largest component in a company’s current liabilities. These are the payments due to the suppliers, and the company should pay for it in a year it bought the raw materials. Another type of current liabilities that we are going to discuss here is the accrued expenses. These are the expenditures that have already incurred but have not become payable (Also see Journal Entries for Accounts Payable Account) to the third party, for example, salary payable and interest payable.
Unearned revenue is also one of the types of current liabilities. These are the advanced payments that the customer has made for the work that your company needs to complete in the near future. Dividend payable, which refers to the dividend that your company has declared, yet have not paid to the shareholders, is one of the current liabilities too. Also, you should include the current portion of your non-current liabilities when you calculate the current liabilities of your company. This is the part of the long-term debt that will become due in the following year.
You may analyse the current liabilities of your company by using several ways. One of the methods that you can use is by calculating the working capital of your company. To calculate the working capital, you should subtract the current liabilities of your company from the current assets that you own. A high value of working capital indicates that the value of current assets is much higher than that of the current liabilities, and you, as the business owner, may invest that amount to other areas so that your company can earn more profits. A low working capital, on the contrary, can be a sign for short-term liquidity issues as this indicates that your company may not have enough current assets (Also see Introduction to Asset Accounts) to meet the financial obligations.
In short, business owners need to manage their company’s current liabilities as this kind of liability often bring an impact to the cash flow (Also see What Does Negative Cash Flow Mean?) of the company. Thus, the management of current liabilities is crucial as this makes sure that the current assets that the company owns are sufficient to maintain the company’s liquidity in the short term.