Current liabilities are financial obligations or debts that a company is required to pay within a short period, typically within the next 12 months. These obligations are expected to be settled using current assets, such as cash or accounts receivable.
Current liabilities are important for a company to manage because they represent the company’s financial obligations in the near term. If a company is unable to meet its current liabilities, it may face legal action or other negative consequences, such as damage to its reputation or credit rating.
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One way that companies manage their current liabilities is by carefully monitoring their cash flow and ensuring that they have sufficient cash on hand to meet their obligations as they come due.
Companies may also use various financial instruments, such as short-term loans or lines of credit, to manage their cash flow and cover any short-term financing needs.
Features of current liabilities
- Short-term nature: this type of liability is settled within a year or an operating cycle. They are considered short-term because they are expected to be fulfilled soon.
- Payment priorities: these liabilities generally have a higher priority for payment compared to long-term liabilities. Since they are short-term obligations, they are expected to be settled before long-term obligations.
Examples of Current Liabilities
- Accounts payable (money owed to suppliers)
- Accrued expenses (expenses incurred but not yet paid)
- Short-term loans and lines of credit
- Income taxes payable
- Dividends payable
- Customer deposits
