Current Liabilities Explained

Current liability is that entry of the balance sheet that has to be paid by the company to any third party within a year. It is the responsibility of the company to pay current liabilities within current accounting year. In other words a current liability can be defined as a responsibility owed by a company within the current operating cycle. In order to pay their current liabilities within the due date a business must have sufficient amount of liquidity to ensure on time fulfillment of liabilities. In most of the cases a business fulfills its current liabilities by liquidating its current assets. Another way of paying off current liabilities is to use other sources such as short term debt to fulfill current liabilities. Current liabilities are used to find out financial status of a business by using it in calculating different financial ratios such as current ratio, acid test ratio, quick ratio and cash ratio.

Current liabilities involve a number of accounts of the balance sheet for example accounts payable are also considered as current liabilities. The obligation of the business to pay the sales tax that is charged by the business from the customers and is paid to government is also considered as current liability. Payroll taxes are also form of current liability that is paid to the government. Income tax and interest payable is also considered to be the current liability accounts. Other examples of current liabilities include dividend declared but not yet paid, bank account overdrafts and short term loans that are to be reimburse within a year.

 

 

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