A current liability is an obligation that is 1) due within one year of the date of a company's balance sheet and 2) will require the use of a current asset or will create another current liability. If a company's operating cycle is longer than one year, current liabilities are those obligation's due within the operating cycle.
Current liabilities are usually presented in the following order:
- the principal portion of notes payable that will become due within one year
- accounts payable
- the remaining current liabilities such as payroll taxes payable, income taxes payable, interest payable and other accrued expenses
The parties who are owed the current liabilities are referred to as creditors. If the creditors have a lien on company assets, they are known as secured creditors. The creditors without a lien are referred to as unsecured creditors.
The amount of current liabilities is used to determine a company's working capital (current assets minus current liabilities) and the company's current ratio (current assets divided by current liabilities).
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