Current liabilities are amounts owed by a business that must be paid within one year or during the operating cycle, whichever is a longer amount of time. Liabilities are reflected in the accounting records as payables or accrued liabilities. Current liabilities may also arise when businesses owe salaries and wages earned by employees that will not be paid until the following pay cycle. Unremitted employee payroll deductions and employer payroll tax liabilities are also forms of payroll-related liabilities. Contingent liabilities are liabilities that involve uncertainty. Such liabilities are triggered by a past event and are expected to be resolved in the future.
At A Glance
Current liabilities are short-term obligations and are a source of short-term financing for a business. Examples of current liabilities are trade accounts payable, short-term loans and notes, and payroll liabilities.
Accounts payable are current liabilities that represent amounts owed to suppliers of goods or services.
- Stakeholders, including managers, creditors, and investors, are interested in knowing about a company's debt obligations and what is due in the short and long term. Financial statements reveal which amounts are due in the short term and which are due in the long term.
- Short-term notes payable represent funds the company has borrowed for a short period of time and are, therefore, considered current liabilities on the balance sheet.
- Gross earnings are reduced by deductions including taxes and other contributions, such as health insurance. Payroll taxes and other deductions are current liabilities until they are remitted to the appropriate government agency or organization.
- An employee's compensation package may consist of more than a salary and wages. Benefits such as paid vacation, insurance, and a pension plan may be included. Such benefits may generate current liabilities until remitted.
Paying employees involves determining the type of compensation, computing payroll deductions, preparing payroll records, and issuing paychecks.
- Employees typically have earned salaries not yet paid by the end of each accounting period, because of the difference in timing of the payroll cycle and pay cycle end date. The unpaid salaries are accrued current liabilities.
- The payroll payment process requires internal controls to ensure that payroll expense is accurate, valid, and documented in a timely manner and that no payroll fraud occurs.
- Information for certain liabilities, such as when or if they will become due and their amount, may not be easily determined. Therefore, these liabilities are called "contingent liabilities."
- The type of contingent liability, whether probable, possible, or remote, determines how it is recorded in the financial statements.