Current liabilities: Meaning, examples and how to calculate

To get a realistic snapshot of your business’s financial health, you’ll need to keep tabs not only on the money you’re making but also on the money you owe and the timeframe you have to pay it. In addition to your long-term debts, your current liabilities are the debts your company needs to pay off within the next year. Keeping track of them can give you a solid idea of how well your business is managing its financial responsibilities and whether it can pay off what it owes on time.

Keep reading to learn more about current liabilities and understand how they’re used in business. 

What you’ll learn:

• Current liabilities are the short-term financial obligations your business has to pay—generally over the course of a year.

• Your business’s current liabilities are reflected on the balance sheet and can be used to measure your company’s financial health.

• There are different types of current liabilities, like accounts payable, accrued expenses, taxes payable and more.

Current liabilities are the short-term debts that your company needs to pay off within a year. Sometimes, if your company’s operating cycle—i.e., the time it takes to buy inventory and make a profit—is longer than a year, those liabilities can be paid back within that cycle instead. Liabilities typically appear on your balance sheet, which gives a snapshot of what your business owns—its current assets—and its current liabilities, at a specific point in time. The balance sheet also shows shareholder equity. When you add that to your total liabilities, it should match your total assets. 

Your business’s current liabilities can be compared to its current assets—items like accounts receivable and stock inventory that can be turned into cash within a year. This comparison creates a ratio of current assets to current liabilities, which shows how well your business can pay off its debts on time. If your business’s current assets are greater than its current liabilities, it’s a good indicator that it is in a healthy financial position.

You can pay off your current liabilities in a couple of ways. The most common is turning your current assets into cash through sales, also known as liquidation. You can also swap one debt for another, essentially replacing one liability with a different one.

Companies may have different types of liabilities, such as:

This is the most common type of current liability. It shows how much your company owes to creditors and suppliers for products or services you’ve already used. Accounts payable can also cover regular credit agreements you have with suppliers, and they usually show up as unpaid invoices.

These are expenses, like employee wages or utility bills, that your business has run up but hasn’t paid yet. Sometimes, accrued expenses don’t come with an invoice, so these costs are often estimated.

The income tax your business owes to the government is considered a current liability because these taxes usually need to be paid within the year. How much you owe depends on your company’s profit during a specific period of time. That profit is taxed at rates set by the state and federal governments.

This is the money your employees have earned but you haven’t paid yet. Depending on how often you run payroll, this number can change frequently. For example, if you pay your employees every two weeks, this liability will update along with each paycheck.

This is the amount your business owes to shareholders for dividends that have been declared but not yet paid. Dividends payable are considered a current liability because they represent the profit your company is responsible for paying to shareholders—usually within the year.

The interest your business accrues on credit products—such as SBA business loans—can be considered a current liability. It’s often called interest payable or accrued interest, and it illustrates how much you still owe your lender.

This is money your business has already collected for a product or service you haven’t delivered yet. Think of unearned revenue—also called deferred revenue or advance payments—as a prepayment you’ll need to make within the year.

Notes payable—sometimes called promissory notes—are written agreements where one person agrees to pay another a set amount of cash by a certain deadline. Notes payable typically include information such as:

• The total amount to be paid

• The interest rate on the loan

• The names of the payer and payee

• The loan’s maturity date—or when the final payment will be made

• The signature of the loan payer and the date

This refers to the payments on long-term debt that are due within the next year. Even though a long-term debt isn’t considered a current liability, the amount you have to pay off soon—within a year or within the time frame of your operating cycle—counts as a short-term obligation.

You can figure out your company’s current liabilities by adding up all your short‑term debts. This formula can look different, depending on your business, because there are many types of liabilities you could be totaling. Here’s an example formula for a company with debts from accounts payable, accrued expenses, wages payable and interest payable on a loan:

Current liabilities = Accounts payable + Accrued expenses + Wages Payable + Interest payable

Understanding how to calculate your current liabilities is useful because it helps you figure out other important business metrics. For example, this calculation can help you figure out your business’s working capital, which gives you a clear picture of your company’s short-term financial health. It’s also an important piece when you’re putting together a cash flow statement.

Take a look at a fictional coffee shop, Roast & Repeat, to see how current liabilities show up on its balance sheet:

In this example, the business’s current liabilities from 2024 include:

• Accounts payable totaling $54,220

• Dividends payable totaling $8,420

• Income taxes payable totaling $9,800

• Accrued salaries and wages totaling $10,300

This means the business’s current liabilities were $82,740. When you add this to the noncurrent liabilities from 2024—$121,670—you get total liabilities of $204,410 for the year. Adding total liabilities to the total shareholder equity of $16,115 gives you $220,525, which represents the total liabilities and shareholder equity for 2024. When you compare this to the total assets—both current assets and noncurrent assets—from 2024, you’ll see it balances out at $220,525.

Your current liabilities show how well your business manages its finances and stays on top of debts that need to be paid. Potential investors and creditors often take a close look at these when deciding whether to do business with you or offer you a line of credit.

By effectively managing your current liabilities, you can fuel growth for your organization. If you’re ready to take your business to the next level, you might consider a business credit card from Capital One. You can get pre-approved today without impacting your credit.