Current liabilities

Current liabilities

Current liabilities are those amounts that a company owes that fall due within one year. Even when a company has a loan that might be paid over a period that is longer than 12-months, the amount of the loan that falls due within one year should be included within current liabilities. 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.

Amounts that fall due after more than one year are referred to as long-term liabilities. Bonds, mortgages and loans that are payable over a term exceeding one year would be long-term liabilities or fixed liabilities.

It is important for businesses to identify what amounts fall due within the next 12-months and compare these to current assets to make sure the business is liquid. The proper classification of liabilities is essential when considering a true picture of an organization's fiscal health.

Where a business is not able to meet it's liabilities as they fall due then thecompany becomes insolvent. The directors of a business that is or becomes insolvent are duty bound to notify the creditors and the shareholders of the business and to immediately take action to protect the existing creditors and not to take on any further credit knowingly to the extent that it can never be paid.

An insolvent company is usually put into liquidation, but can sometimes be saved after being put into administration, by being sold on to an investor that has additional cash in order to resolve the cash flow problems the business is experiencing.

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