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Current Liabilities Formula

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Current Liabilities?

Current liabilities are the obligations of the company expected to get paid within one year and are calculated by adding the value of trade payables, accrued expenses, notes payable, short-term loans, prepaid revenues, and the current portion of the long-term loans. These financial obligations are usually compensated using the current assets of the company.

Current Liabilities

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Investors and creditors keep a close eye on the net current liabilities formula to ensure the management is using their resources efficiently to manage their immediate financial obligations. Typically, a business’s largest portion of their immediate financial obligation is for trade payables where they have to pay their suppliers for goods received.

Current Liabilities Formula Explained

Current liabilities formula is used by businesses and corporations to determine its immediate financial obligations arising through business activities. These expenses or outstanding payments are usually met through the use of current assets.

Current liabilities are those liabilities for which the company is liable within a time frame of one year. It is the amount that is generally concerned for a particular business cycle. Current liabilities items are usually those attached to a company’s trading securities of a companyTrading Securities Of A CompanyTrading securities are investments in the form of debt or equity that the company's management wants to actively purchase and sell to make a profit in the short term with securities they believe will increase in price. These securities can be found on the balance sheet at the fair value on the balance sheet date.read more.

Some most common line items for current liabilities are notes payableNotes PayableNotes Payable is a promissory note that records the borrower's written promise to the lender for paying up a certain amount, with interest, by a specified date. read more, accounts payableAccounts PayableAccounts payable is the amount due by a business to its suppliers or vendors for the purchase of products or services. It is categorized as current liabilities on the balance sheet and must be satisfied within an accounting period.read more, accrued expenses, unearned revenueUnearned RevenueUnearned revenue is the advance payment received by the firm for goods or services that have yet to be delivered. In other words, it comprises the amount received for the goods delivery that will take place at a future date.read more, current portion of long term debtCurrent Portion Of Long Term DebtCurrent Portion of Long-Term Debt (CPLTD) is payable within the next year from the date of the balance sheet, and are separated from the long-term debt as they are to be paid within next year using the company’s cash flows or by utilizing its current assets.read more, and other short term debt.

Current Liabilities Explained in Video

Formula

Current liabilitiesCurrent LiabilitiesCurrent Liabilities are the payables which are likely to settled within twelve months of reporting. They're usually salaries payable, expense payable, short term loans etc.read more are those line items of the balance sheet that are liable to the company within a year. The calculation for the current liabilities formula is relatively simple. It is a summation of all the current liabilities of the company. The current liabilities are notes payable, accounts payable, accrued expenses, unearned revenue, current portion of long-term debt, and other short-term debt.

Current Liabilities Formula

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Mathematically, the Current Liabilities Formula is represented as,

Current Liabilities formula = Notes payable + Accounts payable + Accrued expenses + Unearned revenue + Current portion of long-term debt + other short-term debt.

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How To Find?

Current liabilities are a culmination of different types of expenses that have to be settled within one year since the invoice was raised. Therefore, it completely depends on the urgency of a particular type of liability and the nature of business.

For example, a business might want to pay out their short-term loan quicker and pay their suppliers slightly later as the interest rates on such loans are usually higher.

However, to find the total current liabilities formula, the management must sit down with their accountant to gather data for all their obligations within the year to schedule payments for each of them as per priority.

Examples

Let us understand the concept of net current liabilities formula with the help of a few examples. These examples will help us understand the intricate details of the concept.

You can download this Current Liabilities Formula Excel Template here – Current Liabilities Formula Excel Template

Example #1

A simple example of the current liabilities lets us consider an arbitrary company. To calculate the total current liabilities of company A. We need to assume the values for the different line items for that company, the summation of which will give us the total current liabilities for that company.

Use the following data for the calculation of the Current Liabilities Formula.

CurrentLiabilitiesEg1

Now, let us do the calculation of the Current Liabilities formula based on the given information,

Current Liabilities Eg 1-1-1
  • Total Current Liabilities = $150+$210+$50+$100+$55+$50

Current Liabilities will be –

CurrentLiabilitiesEg1-2
  • Current Liabilities = $615

The total current liabilities for company A, in this case, are $615. It implies the company is liable for $615 within one year. It is the amount that is generally concerned for a particular business cycle. Current liabilities items usually are those which are attached to the trading securities of a company.

Current liabilities are always looked upon concerning the current assets. Current liabilities are used to calculate the current ratioCurrent RatioThe current ratio is a liquidity ratio that measures how efficiently a company can repay it' short-term loans within a year. Current ratio = current assets/current liabilities read more, which is the ratio of current assets and current liabilities. Current is also used in calculating working capitalCalculation Of Working CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)"read more, which is the difference between current assets and current liabilities.

Example #2

Current liabilities of Reliance Industries. To calculate the total current liabilities of reliance industries, we need the values for the different line items for that company, the summation of which will give us the total current liabilities for that company. Below is the presentation of different line items of reliance industries for the period of March 2018 and the total current liability for reliance industries for that period.

Use the following data for the calculation of the Current Liabilities Formula.

CurrentLiabilitiesEg2

Now, let us do the calculation of the Current Liabilities formula based on the given information,

Current Liabilities Eg 2 - 2
  • Total Current Liabilities=$15,239+$88,675+$85,815+$918

Current Liabilities will be –

CurrentLiabilitiesEg .2-2

Current Liabilities = $190,647

The total current liabilities for the reliance industries are Rs 190,647 cr. It implies the company is liable for Rs 190,647 cr within one year. It is the amount that is generally concerned for a particular business cycle. Current liabilities items are usually those attached to a company’s trading securities. Current liabilities are always looked upon concerning the current assets. The total current assets for reliance industries for the period are Rs 123,912cr.

Generally, the current asset is higher than the current liability. But in some cases, like for reliance industries, if it is the opposite, it may signal that the company can negotiate better with its creditors. Current liabilities are used to calculate the current ratio, which is the ratio of current assets and current liabilities. Current is also used in calculating working capital, which is the difference between current assets and current liabilities. In the case of reliance industries, the working capital is negative.

Example #3

Current liabilities of Tata Steel. To calculate the total current liabilities of Tata steel, we need the values for the different line items for that company, the summation of which will give us the total current liabilities for that company. Below is the presentation of different line items of reliance industries for the period of March 2018 and the total current liability for reliance industries for that period.

Use the following data for the calculation of the Current Liabilities Formula.

CurrentLiabilitiesEg3

Now, let us do the calculation of the Current Liabilities formula based on the given information,

Current Liabilities Eg3-2
  • Total Current Liabilities=$669+$11,242+$12,959+$735

Current Liabilities will be –

CurrentLiabilitiesEg3-2

Current Liabilities = $25,605

The total current liabilities for Tata Steel for the period are Rs25,607 cr. It implies the company is liable for Rs25,607 cr within one year. It is the amount that is generally concerned for a particular business cycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline.read more. Current liabilities items usually are those which are attached to the trading securities of a company.

Current liabilities are always looked upon concerning the current assets. The total current assets for Tata steel for the period are Rs 34,643. Current is used in calculating working capital, which is the difference between current assets and current liabilities. Tata Steel has a positive working capital, which is common.

Importance

Let us understand the importance of the total current liabilities formula through the discussion below.

Current liabilities are always looked upon concerning the current assets. Current liabilities are used to calculate the current ratio, which is the ratio of current assets and current liabilities. Current liabilities are also used in calculating working capital, which is the difference between current assets and current liabilities.

Generally, the current assetsThe Current AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc.read more are higher than those of a company’s current liabilities. It is common to have a current ratio of 1.5 to 2. Working capital is generally positive values; otherwise, it may signify that the company is running with the help of higher short-term debt.

Recommended Articles

This article has been a guide to the Current Liabilities Formula. Here we discuss how to calculate Current Liabilities with examples and a downloadable excel template. You can learn more about financing from the following articles –

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