What are current liabilities on a balance sheet?

Definition and examples

Current liabilities are obligations a company expects to settle within its operating cycle or within twelve months, whichever is longer. The Financial Accounting Standards Board describes current liabilities as present obligations arising from past events that will consume current resources. Under international rules, the International Accounting Standards Board at the IFRS Foundation makes a similar distinction in IAS 1 Presentation of Financial Statements, treating liabilities as current when they are due within the next twelve months or when the entity does not have an unconditional right to defer settlement. Common examples include accounts payable for goods and services, short-term borrowings and the current portion of long-term debt, accrued wages and taxes payable, unearned revenue for services not yet delivered, and commercial paper issued to bridge cash needs.

Causes and measurement

Current liabilities arise from normal operating and financing decisions. Buying inventory on credit creates accounts payable; hiring workers creates accrued payroll obligations; borrowing for seasonal working capital generates short-term debt. Measurement generally reflects the amount required to settle the obligation in cash or by providing goods or services. Accounting standards require entities to assess the timing and certainty of payment and to disclose significant terms and conditions. The U.S. Securities and Exchange Commission expects transparent presentation of current obligations in periodic filings so creditors and investors can assess near-term cash demands and contractual commitments.

Why current liabilities matter

Current liabilities directly influence working capital, defined as current assets minus current liabilities, and determine liquidity ratios such as the current ratio and quick ratio used by lenders and rating agencies. High short-term obligations relative to liquid assets raise the risk of liquidity shortfalls, potentially forcing asset sales, renegotiation of supplier terms, or borrowing at higher cost. For businesses in regions with limited access to affordable short-term finance, such as some developing markets, reliance on trade credit can be both a necessity and a vulnerability, affecting supply chains and local employment.

Consequences for stakeholders and territories

For employees and local communities, a sudden deterioration in a firm’s short-term liquidity can lead to delayed payroll, cutbacks, or plant closures, with broader social and economic consequences. Creditors monitor covenant ratios tied to current liabilities; breach can prompt acceleration of debt and legal remedies that reshape territorial investment patterns. Cultural norms also influence typical payment terms: industrial suppliers in some countries commonly extend 60 to 90 days credit, while others expect prompt settlement, which changes the composition and management of current liabilities across jurisdictions.

Practical implications for managers

Managing current liabilities requires balancing operational needs and risk. Effective cash forecasting, negotiation of payment terms, and access to committed short-term credit lines reduce the chance that normal seasonal cycles become crises. Accounting standards from authoritative bodies such as the Financial Accounting Standards Board and the International Accounting Standards Board at the IFRS Foundation, together with disclosure expectations from the U.S. Securities and Exchange Commission, guide how firms report these obligations so users can evaluate near-term solvency and the broader economic implications of a company’s short-term claims.