Current liability
Encyclopedia
In accounting
, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer. A more complete definition is that current liabilities are obligations that will be settled by current assets or by the creation of new current liabilities.
An operating cycle for a firm is the average time that is required to go from cash to cash in producing revenues.
For example, accounts payable for goods, services or supplies that were purchased for use in the operation of the business and payable within a normal period of time would be current liabilities.
Bonds
, mortgages
and loan
s that are payable over a term exceeding one year would be fixed liabilities
or long-term liabilities
. However, the payments due on the long-term loans in the current fiscal year could be considered current liabilities if the amounts were material.
The proper classification of liabilities provides useful information to investors and other users of the financial statements. It may be regarded as essential for allowing outsiders to consider a true picture of an organization's fiscal health.
One application is in the current ratio, defined as the firm's current assets divided by its current liabilities. A ratio higher than one means that current assets, if they can all be converted to cash, are more than sufficient to pay off current obligations. All other things equal, higher values of this ratio imply that a firm is more easily able to meet its obligations in the coming year.
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer. A more complete definition is that current liabilities are obligations that will be settled by current assets or by the creation of new current liabilities.
An operating cycle for a firm is the average time that is required to go from cash to cash in producing revenues.
For example, accounts payable for goods, services or supplies that were purchased for use in the operation of the business and payable within a normal period of time would be current liabilities.
Bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, mortgages
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
and loan
Loan
A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....
s that are payable over a term exceeding one year would be fixed liabilities
Fixed liability
A fixed liability is a type of debt. Bonds, mortgages and loans that are payable over a term exceeding one year would be fixed liabilities.See also Long-term liabilities....
or long-term liabilities
Long-term liabilities
Long-term liabilities are liabilities with a future benefit over one year, such as notes payable that mature longer than one year.In accounting, the long-term liabilities are shown on the right wing of the balance-sheet representing the sources of funds, which are generally bounded in form of...
. However, the payments due on the long-term loans in the current fiscal year could be considered current liabilities if the amounts were material.
The proper classification of liabilities provides useful information to investors and other users of the financial statements. It may be regarded as essential for allowing outsiders to consider a true picture of an organization's fiscal health.
One application is in the current ratio, defined as the firm's current assets divided by its current liabilities. A ratio higher than one means that current assets, if they can all be converted to cash, are more than sufficient to pay off current obligations. All other things equal, higher values of this ratio imply that a firm is more easily able to meet its obligations in the coming year.