What is Current Liability?
A current liability is a liability due in less than one year.
How Does Current Liability Work?
A liability is a claim on a company's assets. Technically, a liability is a required transfer of assets or services that must occur on or by a specified date as a result of some other event that has already occurred.
For example, let's assume that Company XYZ borrows $10 million from Bank ABC. Because the loan is not due for five years, Company XYZ records the portion of the loan that is not due in the next 12 months as a long-term liability. The part that is due in the next 12 months, however (let's say it's $145,000), is recorded as a current liability.
It is important to note here that although debt commonly comes to mind when one considers liabilities, not all liabilities are debt. Companies may incur several other types of current liabilities, including (but not limited to) upcoming payroll, bonuses, legal settlements, payments to vendors, certain derivatives, contracts, certain types of leases and required stock redemptions. The key threshold, however, is that those amounts must be due within in the next 12 months.
Why Does Current Liability Matter?
Information about a company's current liabilities is a key component of accurate financial reporting and a crucial part of thorough financial analysis. Although the Financial Accounting Standards Board, the Securities and Exchange Commission (SEC) and other regulatory bodies define how and when a company's liabilities are reported, and although liabilities make up a significant portion of the balance sheet, not all liabilities are required to appear on the balance sheet, which is why analysts also must study carefully the notes to a company's financial statements.
