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Current liabilities are debts that must be paid off within the current fiscal year, including recurring expenses and short-term loans. Long-term debts with payments due in the current year can also be considered current liabilities.
In terms of accounting practices, current liabilities are understood to be any outstanding debt that is expected to be paid in full within the current fiscal year. Payments for these liabilities are made from accounts payable, such as the operating account for a business. Understanding what does and does not constitute this type of responsibility makes the process of managing the financial affairs of a business or household much easier, and is an excellent indicator of the organization’s overall financial stability.
When defining current liabilities, it’s important to think in terms of recurring expenses that are typically handled within thirty to ninety days as normal operation. These examples would include raw materials used in the production process, goods and services that are used in the business‘s day-to-day operating process, and equipment purchases that will require only a short time to pay off in full. Short-term loans that will also be paid off during the current tax year can be considered current liabilities.
Along with items that may be considered current debt, any other items that appear on the corporation’s balance sheet may be considered current liabilities, as long as the money owed is paid off within the year. Because balance sheets typically group short-term and long-term debt into two different sections, each line item should be evaluated according to the early resolution date and sheeted accordingly.
An exception to the general application of current liabilities has to do with payments currently due on long-term mortgages, bonds, and business loans. If the payment dates occur in the current fiscal year, it is acceptable to consider the amount of those payments as current liabilities. However, any balance owed on those long-term obligations must be recorded elsewhere in the company’s accounting as long-term debt.
Smart Asset.
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