The balance sheet includes three critical components. These are assets, equity, and liabilities. In accounting, each of these represents a different category of balances. Companies must identify any accounts that meet the definition for these components. Once they do so, they must classify those accounts under the relevant heading. In the end, the total balance in assets should match the total amounts for the other components.
Apart from those, the balance sheet may also include four subheadings. These come from classifying assets and liabilities based on how long they last. Usually, companies must separate these items based on the upcoming 12 months. This process entails reporting those balances undercurrent and non-current portions. For equity, separating those items is impossible and, thus, not required.
Companies must present their liabilities as current or non-current. The accounting definition for the term “liability” includes various elements. Firstly, it must be an obligation from past events. Similarly, it must result in an outflow of economic benefits in the future. Once a balance meets this definition, companies must report it as current or non-current liabilities.
What are Current Liabilities?
Current liabilities include any short-term financial debts that companies accumulate. Usually, these debts come from daily operational needs. In accounting, however, the definition for current liabilities differs. In that case, it includes any obligations that companies expect to settle within 12 months. Any debts that fall after that period become a part of non-current liabilities.
Essentially, current liabilities are obligations that require a settlement within a year. These include short-term financial amounts owed to suppliers or similar parties. In some cases, current liabilities may also consist of long-term debts. However, it occurs when those debts become payable within 12 months. Therefore, determining when a company expects to settle debts is crucial to identifying current liabilities.
A critical part of the definition for current liabilities is whether companies expect to settle a debt. The expectation is crucial in determining the classification of an obligation. In some cases, even long-term debt falls under current liabilities. It occurs as the expected time to settle the debt falls within 12 months. Short-term debts with an expected settlement of more than a year will become non-current liabilities.
Overall, current liabilities include any obligations repayable within 12 months. This definition is crucial in separating debts based on accounting. Current liabilities appear on the balance sheet as a separate heading. Nonetheless, it is still a part of the total liabilities a company has accumulated. Current liabilities only represent a presentation difference for obligations. It does not change their essence.
What are the Types of Current Liabilities?
Current liabilities may include a broad range of obligations. Nonetheless, some items are more prevalent under this heading than others. Some of the most common current liability balances include the following.
Accounts represent amounts owed to suppliers in exchange for past purchases. Usually, these amounts are payable within 12 months. Therefore, they appear under current liabilities in the balance sheet. Companies record these amounts when a supplier sends an invoice for past purchases. Usually, the period for accounts payable differs based on the agreement with the underlying supplier.
Accrued expenses are prevalent items within current liabilities. These represent any expenses incurred but not paid for till the presentation date. In accounting, accrued expenses are necessary under the accrual concept. This concept entails recording expenses when they occur rather than when the settlement happens. Accrued expenses may include unpaid utility, salary, and other expenses.
Companies may also obtain short-term debt to meet their operational needs. Usually, this debt helps finance daily activities. Short-term debt is a crucial part of a company’s working capital management. In most cases, these debts last shorter than 12 months. Therefore, companies classify them as current liabilities in the balance sheet.
Unearned revenues are advances received from a customer for future sales. Since a company has not delivered goods or services for the receipt, they cannot record revenue. Nonetheless, they must recognize an advance from the customer. Therefore, they account for it as unearned revenues in the balance sheet. Since the sale occurs within a year, they fall under current liabilities.
In most cases, taxes payable fall under current liabilities. These include income or corporate tax payable for the current account period. In some cases, they may also contain other tax-related liabilities, for example, sales tax payable. Either way, companies pay these taxes within 12 months of recording them. Therefore, they fall under current liabilities.
What are Other Current Liabilities?
The above types of current liabilities show the most common items under the heading. For most companies, those are the only items that appear under it. Usually, these items are material enough to require a separate line item on the balance sheet. However, some liabilities may remain that do not classify under those headings. Companies may classify them as other current liabilities.
Other current liabilities are obligations that require a settlement within 12 months. However, they do not constitute material balances to disclose separately on the balance sheet. Companies use the other current liabilities line item to accumulate them under one heading. Usually, these include insignificant or uncommon liabilities aggregated under one name.
Other current liabilities may include various balances within them. However, disclosing those balances separately may not be necessary. Since these usually include insignificant items, companies prefer to sum them under one heading. Companies may still present a breakup for this heading in the notes to the financial statements. However, accounting standards do not dictate how companies must report these liabilities.
Overall, other current liabilities are a line item that aggregates various balances. These balances meet the definition for current liabilities set by accounting standards. However, they are not material enough to warrant separate disclosure on the balance sheet. Therefore, companies present them together under one heading. In some cases, other current liabilities include prevalent items within insignificant balances.
What is the Accounting for Other Current Liabilities?
The accounting for other current liabilities does not require a different treatment. Usually, companies treat each item within this heading under its accounting treatment. Once aggregated, these items become a part of the other current liabilities line item in the balance sheet. This presentation entails the only accounting treatment for other current liabilities.
Other current liabilities include various items. However, these may differ based on how companies classify their obligations. As stated above, other current liabilities only include items with insignificant balances. Therefore, the balances under this heading may differ based on their amounts. Generally, other current liabilities include the following:
- Minor advances from customers.
- Accrued expenses with immaterial amounts.
- Insignificant expenses are payable.
- Unpaid invoices with minor amounts.
Companies must determine when disclosing other current liabilities separately. Usually, this decision occurs based on whether the underlying balances represent material amounts. In some cases, accounting standards may also require companies to disclose those amounts separately. If an item is immaterial, companies can classify them as other current liabilities.
The classification for other current liabilities also depends on several other factors. For example, the industry may also dictate which items go under this balance. Some companies must also provide details on what this balance includes in the notes. However, this requirement may not apply to all companies. Overall, accounting for other current liabilities is straightforward.
Companies must classify their liabilities as current or non-current. Usually, this process involves identifying obligations that fall within or after 12 months. Current liabilities include items that come within a year. They contain prevalent items, such as accounts payable, accrued expenses, and short-term debt. Other insignificant balances usually become a part of other current liabilities.