What Are Current Liabilities? Definition from Hapi's Finance Dictionary - Hapinary

Current liabilities are a set of short-term financial obligations of a company—typically due within one year. They are also known as short-term liabilities or "short-term payables" and are based on the operating cycle of a company, which is the time it takes to purchase inventory and convert it into cash through sales.

Definition of Current Liabilities

The Royal Spanish Academy defines current liabilities as the “total monetary value of debts and commitments that burden a company, institution, or individual, and that are reflected in their accounting.”

In other words, when we talk about liabilities, we are referring to the monetary obligations or debts that a company has with other entities, investors, among others, due to a past transaction.

What Is the Definition for Investors?

We investors are known as creditors, who, according to the RAE, are people who "have a right or action to demand the fulfillment of an obligation.”

In this sense, the definition of current liabilities is that they are short-term liabilities or "short-term payables" that every investor receives after acquiring a share (or fractional share) of a company, or an ETF, related to the payment of dividends.

When we talk about the short term, we refer to a period of less than one year. Additionally, something you should know about current liabilities is that this "current" characteristic means they are financial resources that are not intended to remain within the company—they are meant to be paid off.

In that sense, there may be various resources planned to be debited, so what are the current liabilities of a company? Let’s take a look:

Types of Current Liabilities in a Company: Identify Them

If you have a company, identifying each of the current liabilities in an accounting plan is important because it allows you to know which are the immediate expenses you need to cover.

Typically, the types of liabilities include:

• Bank debts or loans;
• Debts with companies and associates or commercial credits;
• Trade creditors;
• Other accounts like taxes payable;
• Liabilities linked to non-current assets associated with sales.

Next, we show the highlights of Apple Inc.'s quarterly financial statement, which serves as an example of short-term current liabilities within a real balance sheet.

• Last quarter: current liabilities amounted to $106.4 billion;
• Accounts payable were $40.1 billion, representing short-term debts Apple owes to its suppliers;
• Commercial paper was $5 billion for the period;
• Long-term debt due next year was $8 billion.

So, analyzing Apple Inc.’s situation, the total current assets were $121.5 billion for the quarter. The $121.5 billion compared to the $106.4 billion in current liabilities shows that Apple has sufficient assets to cover its current liabilities in the short term.

In conclusion, current liabilities are paid with the income generated by a company's operating activities. Additionally, another detail we can identify in current liabilities is that to be classified as such, they must meet some of these characteristics:

• They are current liabilities with a maturity of less than one year;
• They may involve interest payments;
• They can be spontaneous liabilities that do not require constant remuneration;
• They are payable, meaning they are debts to third parties and must be fulfilled in the short term.

Current Assets – Keeping Track

Keeping track of a company’s current assets is not an easy task. That’s why we leave you with some considerations to keep in mind to meet your debit deadlines:

• Record all your operations, considering the relevant regulations in your region;
• Differentiate and establish deadlines clearly;
• Note down each of your movements in the accounts.

Current Assets: The Importance of Knowing Them

The importance and function of current liabilities lie in the growth and maintenance of the company itself, setting aside the idea of associating them with debts or income losses.

Why Is It Important to Know Current Assets?

Their importance lies in the definition of "financing." Various companies need funds to carry out their ideas, ventures, and other different economic activities, and this is possible through current liabilities and planning of current liabilities.

Good management of a company’s liabilities and assets allows it to enjoy good liquidity ratios. You might find this article interesting: What Is a Fixed Asset and What Is It For?

In summary, every company needs to generate enough short-term income to cover its current liabilities. If you are an investor, you need to know a company’s profitability.

Expanding your financial vocabulary allows you to understand and delve deeper into the world of the stock market and investments. If you are in Latin America, there is now a great opportunity to start investing in stocks, ETFs, and now with Hapi’s new update, you can also buy and sell over 30 types of cryptocurrencies.