Current liabilities - What are current liabilities?
Current liabilities are short-term (less than 12 months) debts to suppliers, HMRC, VAT, & NI payments along with any short-term loans, for example
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Current liabilities make up part of your company’s balance sheet and are also referred to as “short-term liabilities”, as they cover any debt which should be repaid within 12 months.
Types of current liabilities
Current liabilities in your business can take on a variety of forms, but essentially, they are any amounts that are owed.
- Your accounts payable (amounts owed to your suppliers)
- Any VAT due to HMRC if you are VAT registered
- Tax and National Insurance due on wages or salaries paid out to your employees
Also included in current liabilities will be any short-term loans the company may have taken out from a bank or another lender.
The types of current liabilities that your business incurs will be related to your particular industry, the country in which your business operates, as well as several other factors that might result in more than the most common types as listed above.
Paying off current liabilities
Most companies use current assets to pay off liabilities. This can either be in the form of cash, or by converting short-term assets to cash. It’s important for a business to carefully monitor their current ratio (the current assets divided by the current liabilities) to ensure that they have enough cash to pay off their current liabilities.
Current liabilities in accounting
In traditional accounting practice, a liability is recorded as a credit under current liabilities on the balance sheet. Liabilities that are expected to be paid back in more than a year are considered long term and are listed further down on the balance sheet.
Current liabilities are credited when a payment obligation is received, and are debited when the payment is made.
For example: Stuart’s company purchases £300 of raw materials from Supplier A. Supplier A gives Stuart’s company 60 days to pay the full amount. Stuart’s company records the £300 as accounts payable and credits the current liabilities in the balance sheet.
Stuart’s company pays the £300 in 20 days and so debits current liabilities for the full amount.
Current liabilities in Debitoor
Debitoor automatically tracks the amount your company owes when you update your expenses. On the dashboard, you can enable graphs to show your income and expenses for different time periods. You can also view a graph of your expenses, which changes as soon as you enter a payment to balance your accounts.