Understanding Current liabilities on the balance sheet

Balance sheet has three components, assets, liabilities and owner’s equity. One of the section under the component liability is “current liability”.

Current liabilities are obligations that is due and payable within 12 months from the date of balance sheet or within one operating cycle, whichever is longer.

In balance sheet, under the current liability section company shows accounts payable, salary outstanding and all other stuff that has to be repaid within 12 months or within the normal operating cycle of the business, whichever is longer.

Type of current liabilities depends on the industry in which the company or firm operates. Some of the specific items found under the section current liabilities are listed below;

Accounts Payable

Accounts payable is the amount that a business obliged to pay in the normal operating cycle for the goods and services received in credit.

In simplified terms, when you purchase goods on credit which needs to be paid back in a shot period of time, it’s known as accountants payable. As the credit period is less than 12 months, it’s shown under the head current liabilities on the balance sheet.

Interest payable

Interest is the cost of borrowing funds from lender. A business may take loan for business expansion or to purchase equipments. Interest payable is the amount of interest expense that are incurred but not paid as on the date of balance sheet. This type of situation will arise when interest has been charged by the bank or financial institution but have not been paid by the company.

Company has to show the entire interest payable amount under the head current liabilities by taking it as an expenses to income statement and simultaneously creating a liability for which payments are not done.

Employees related liabilities

Major portion of employee related liabilities is wages or salary payable for the month of march. This type situation will arise when march month salary has been not been paid or paid in the month of april. If any other month’s salary has not been paid till the balance sheet date, then that has to be included in it.

Apart from salary expense, all other expenses related to employee benefit which has not been paid will be included under this head.

In addition to above items, you are required to add all other current liabilities to the list like Income tax payable, Advance from customers and show it on the balance sheet.

Above examples don’t constitute a full list of current liabilities but they represent some of the most common debts that a business may be responsible to pay within the normal operating cycle.

Current liabilities in a balance sheet is the companion to current asset as the later is the source for payment of current debts.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.