January 26, 2022

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Current Liabilities Meaning and Key Explanations

Meaning and explanations of current liabilities
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The word current means within a short time in the realms of account. For example, if you go to a bank, the bank staff will tell you that your “current” balance is this amount. For liabilities, it is similar.

What are the Current Liabilities?

It is a current economic obligation that must be paid within the next reporting year or an operating cycle whichever is longer.

It can also be defined as a debt of an entity payable within the next year.

Key Explanations

A current economic obligation. Current liabilities are economic obligations. This may only mean that the entity is committed to it and most pay to obligations in due time. Furthermore, it involves the movement of Cash out of the business within a year. Such economic obligation is therefore paid from the firm’s economic resources.

It is a debt. The debts are owed by the company to outsiders including banks, suppliers, creditors, tax authorities, shareholders and so on. The company may have loans to pay, tax returns to remit or dividend to pay to shareholders. However, such debt must be within a year.

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It must be within the next reporting year. Current liabilities must be paid with in the next reporting year. In preparing a statement of financial position, current liabilities are usually stated separately from other liabilities.

In doing so, the amount shown in the statement represents current economic obligations that must be paid within the next reporting year. A reporting or financial year is usually one year.

It is paid within an operating circle. This implies that the debt must be paid in an operating period. An operating period is determined by the nature of the goods sold or the services rendered. It also depends on the time it takes for the business to convert cashback to cash.

Perishable goods will usually involve a short conversion period while durable goods take a longer period to convert to cash. However, as a rule of thumb, current liabilities should be paid within a year.

Examples of current liabilities are and not limited to account payables, bank loans and overdraft, tax payable, the dividend declared, accrued expenses, prepaid income and current portion of the debenture.

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Conclusion

For an event to be classified as current liabilities, it must be paid within a year. Examples of such obligations have been listed.

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