Current liability

Definition

A current liability is a financial obligation of a business that is expected to be settled within one year or the business's operating cycle, whichever is longer. Examples include accounts payable, short-term loans, and accrued expenses.

5 Must Know Facts For Your Next Test

1. Current liabilities are listed on the balance sheet under the liabilities section.
2. They are typically settled using current assets such as cash or inventory.
3. Examples of current liabilities include wages payable, interest payable, and unearned revenue.
4. Proper management of current liabilities is crucial for maintaining liquidity and operational efficiency.
5. The quick ratio and current ratio are commonly used to assess a company's ability to pay off its current liabilities.

Review Questions

• What distinguishes a current liability from a noncurrent liability?
• Name three examples of current liabilities found on the balance sheet.
• Why is it important for businesses to manage their current liabilities effectively?

Related terms

Noncurrent Liability: A financial obligation that is not due within one year or the business's operating cycle.

Current Ratio:

A financial metric that measures a company's ability to pay short-term obligations with its current assets.

Accounts Payable:

Amounts a company owes to suppliers for items or services purchased on credit.