This article is part of a larger series on Business Financing.
Current liabilities, also known as short-term liabilities, are all of a company’s debts, financial obligations, and accrued expenses that appear on its balance sheet and are due within 12 months. Current liabilities include accounts payable (A/P), short-term loans, accrued expenses, unearned revenue, and current portions of long-term debts.
Tracking your short-term liabilities gives you a good idea of your company’s short-term financial health, which helps you plan for working capital expenses. Companies in good health should have fewer current liabilities than current assets. Current liabilities aren’t necessarily bad, as taking on short-term debt to fund growth can help your business.
Current Liabilities Formula
The current liabilities formula is the sum of all short-term liabilities.
To calculate current liabilities, use the formula below, adding together all of the listed items:
Notes payable + A/P + short-term loans + accrued expenses + unearned revenue + current portion of long-term debts + other short-term debts = Current Liabilities
Notes payable are the total promissory notes that a company has issued but not yet paid. As long as the due date is within 12 months, notes payable count toward current liabilities.
A/P are short-term financial obligations to suppliers or creditors. A/P are usually for the purchase of goods or services, and they reflect vendor invoices approved and processed but not yet paid.
Short-term loans are debts that must be repaid within one year, including business lines of credit that are due within the next 12 months.
Accrued expenses are recorded on a company’s balance sheet before they’re paid. Accrued expenses are typically periodic and recurring expenses such as salary, wages, utilities, rent expenses, and interest expenses.
Cash received from customers before a company provides goods and services is considered unearned revenue. Gift checks or gift cards are examples of unearned revenue.
Current Portions of Long-Term Debts
Portions of long-term debts equal to the principal due within 12 months count as current liabilities. For example, if you have an outstanding obligation of $300,000 on a commercial real estate loan, and the amount due within 12 months is $30,000, the amount counted toward short-term liabilities is $30,000. The other $270,000 is considered a long-term liability.
All other debts that are payable within one year are considered current liabilities. This includes credit card debts, sales tax payable, payroll taxes payable, dividends, customer deposits, bank overdrafts, salaries payable, and rent expenses.
Example of Current Liabilities
If your business has the following expenses due within the next 12 months, this is how you would calculate your current liabilities:
- Notes payable: $50,000
- A/P: $100,000
- Short-term loans: $50,000
- Accrued expenses: $250,000
- Unearned expenses: $5,000
- Current portion of long-term debts: $25,000
- Other debts/payables: $50,000
To calculate the current liabilities, you would add all of those totals together.
$50,000 + $100,000 + $50,000 + $250,000 + $5,000 + $25,000 + $50,000 = $530,000 of current liabilities.
How to Calculate Average Current Liabilities
A company’s average current liabilities are the average value of its short-term liabilities from the beginning balance sheet period to its end.
To calculate the average current liabilities for a particular period, add the total value of current liabilities at the beginning of the period to the total value at the end of the period, then divide by two.
(Total current liabilities at the beginning of period + Total current liabilities at the end of period) / 2 = Average current liabilities
For example, if your current liabilities at the beginning of last year was $530,000, and they’re now $400,000, you would add those two numbers and divide by two to find the average:
($530,000 + $400,000) / 2 = $465,000 Average Current Liabilities
Knowing your company’s current liabilities will help you understand your company’s short-term financial health. This is especially important before you decide to take on more business debt. As part of the requirements for getting a small business loan, the financial health of your company in the short-term and long-term will be considered. In addition, knowing your current liabilities can help you assess your ability to repay additional debt, especially short-term debt due within the next 12 months.