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Current liabilities are any type of obligations or debts that are to be settled in full within one calendar year. Examples of these types of liabilities would be invoices for goods that are to be paid within thirty days of receipt, short-term loans that must be paid off in six months to a year, or even any debts that must be paid immediately. In most situations, current liability is satisfied by using cash assets on hand to retire the debt, using a structured schedule that minimizes the accumulation of additional debt in the form of finance charges.
One of the most common forms of current liability includes the month-to-month expenses that are documented as accounts payable in the accounting records. Liabilities of this type include basic monthly expenses such as rental or mortgage payments, utility bills, and minimum payments due on loans or credit accounts. These types of liabilities are found on the balance sheet. In some cases, the line items are arranged based on the due date associated with each liability, making it easier to settle each debt on or before that date, and thus avoid the application of late fees or additional interest.
Properly accounting for current liability is important, in that many lenders will look at these expenses when considering the extension of a loan. The cumulative amount of the combined liabilities due each month will be compared to the cash assets available to cover those debt obligations. For many households as well as companies, the core of the cash assets is the monthly income or revenue that is received. If the lender feels that the ratio between an applicant’s current liability and his or her current assets indicates that the loan can be repaid according to the terms of the loan contract, the chances of receiving the loan are greatly improved.
Identifying and managing current liability obligations is in the best interest of every household, business, or other type of entity. Doing so helps to maintain a higher credit rating, especially if creditors report regularly that minimum payments are received on time and that debts are settled according to terms. Failure to do so can place the credit rating in jeopardy, and thus make it harder to obtain financing and credit when it is needed or desired. Over time, this failure to manage current liability in a responsible manner can lead to a complete collapse of the entity, and may lead to bankruptcy.