How to Read a Balance Sheet: Current Liabilities

Current liabilities are what a company currently owes to its suppliers and creditors. These are short-term debts, all due in less than a year. Paying them off normally requires the company to convert some of its current assets into cash.

Beyond simply being bills to pay, liabilities -- confusing as this might sound -- are also a source of assets. Any money that a company pulls from a line of credit, or postpones paying from its accounts payable, is an asset that can be used to grow the business.

There are five main categories of current liabilities:

  • Accounts payable
  • Accrued expenses
  • Income tax payable
  • Short-term notes payable
  • Portion of long-term debt payable

Accounts payable
This is the money the company currently owes to its suppliers, partners, and employees -- the basic costs of business that the company hasn't yet paid, for whatever reason. One company's accounts payable is another company's accounts receivable, which is why both terms are similarly structured. A company has the power to push back the due dates on some of its accounts payable. Paying those debts later than expected can often produce a short-term increase in earnings and current assets.

Accrued expenses
The company has racked up these bills, but not yet paid them. These are normally marketing and distribution expenses that are billed on a set schedule and have not yet come due.

Income tax payable
This is a specific type of accrued expense -- the income tax a company accrues over the year, but does not have to pay yet, according to various federal, state and local tax schedules. Although they're subject to withholding, some taxes simply are not accrued by the government over the course of the quarter or the year. Instead, they're paid in lump sums whenever the bill is due.

Short-term notes payable
The company has drawn off this amount from its line of credit from a bank or other financial institution. It needs to be repaid within the next 12 months.

Portion of long-term debt
This represents a chunk of a company's longer-term obligations that may come due in a given year or quarter. That's why it's counted as a current liability, even though it's called "long term."

For more lessons on reading a balance sheet, follow the links at the bottom of our introductory article.


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  • Report this Comment On February 26, 2011, at 2:56 PM, m3coupe4me wrote:

    Ah, this is where things get a little more complicated. Interesting though. Thanks!

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