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Current Liabilities

Current liabilities are those that are due for payment within one year of the balance sheet. They are a firm’s debts due to its creditors, the most common of which are trade creditors and bank loan. Trade creditors are the suppliers of goods that a firm normally deals in and the debts are usually paid within a normal period of time. A liability can only arise when some goods or services are received and the payment has yet to be made.

Current liabilities are also expenses that remain unpaid at the end of an accounting period. They are usually paid shortly after in the new accounting period.

Bank loan is a current asset as it is payable immediately or in the near future. When a bank loan is obtained, the amount increases the liabilities as well as the assets of the firm. A bank loan liability is created and this is listed with the other liabilities. At the same time, the asset of cash increases by the same amount. However, the lender or creditor now has a claim on the assets of the firm that must be paid.

 

Unearned revenues /customer deposits

When adjusting entries at financial year end, unearned revenues are inevitable adjustments if there are any. Unearned revenues are liabilities, so are customer deposits, etc which are amounts received in advance before goods are delivered or services provided. They are revenues that have not been earned yet, and as long as they remain unearned, they are recorded under current liability on financial statements.

Other current liabilities include portions of long-term debts such as a loan that are to be paid in the current financial year. For example, only the portion of the principal sum that is due in the year and its unpaid interest are shown as liabilities on the financial statements.  For example, $2,000 plus interest of a $6,000 loan due for payment in the next twelve months is treated as a current liability. The rest of $4,000 is regarded as a long-term liability.

Short-term debts arising from the purchase of assets are also shown as liabilities. Other examples of current liabilities are accounts payable or creditors accounts, accrued rent/rent payable, wages payable, salaries payable, interest payable, etc.

Current liabilities are balance sheet items and are placed above long-term liabilities on the right hand side of the statement.

Last Updated (Friday, 17 September 2010 11:58)