Balance Sheet items which represent the obligations that the business must settle within one year.
What It Means
Current liabilities represent short-term debt that must be paid off within a year. Typical examples of current liabilities include:
- Accounts payable
- Current portion of long term debt
- Short-term loans
Effective debt management is crucial to business success. Ability of the business to meet its current obligations is vital to its survival. A key ratio that measures this ability is the current ratio, which is defined as the current assets of the business divided by its current liabilities.
The idea is that the business must maintain large enough current ratio indicating that sufficient short-term resources exist to pay its creditors. Typical current ratios for various types of businesses are published in a number of industry references.