Let’s break down what current liabilities are, why they matter, how to track them, and how to make smart decisions using the numbers on your balance sheet.
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What are current liabilities? Definition, types, and how to calculate them in 2025
Current liabilities definition
Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal business operating cycle, whichever is longer. In other words, they’re financial to-dos coming up soon—e.g., accounts payable, short-term loans, or taxes owed.
Take a look at the key characteristics of current liabilities:
Importance of current liabilities on the balance sheet
Current liabilities are listed on the liability side of the balance sheet—usually at the top—because they represent your most urgent financial obligations, which can include accounts payable, payroll, short-term loans, and taxes you owe.
Why does this matter? Current liabilities are one of the clearest indicators of your business’s liquidity—i.e., how easily you can cover short-term expenses using the cash and assets you already have or expect to receive soon. When you compare your current liabilities (what you owe) to your current assets (what you have or expect to bring in soon), you get a sense of how prepared your business is to cover upcoming expenses. This balance is key to understanding your cash flow and overall stability.
Managing current liabilities is a core part of running a healthy business. Tools like QuickBooks Online can help you track your current liabilities in real-time, set reminders for upcoming payments, and make sure you’re always a step ahead.
Types of current liabilities
Knowing what counts as a current liability and how each one impacts your business can help you stay in control of your short-term finances and make smarter decisions.
Below are the most common types of current liabilities you’ll find in small business accounting:
1. Accounts payable
This is the amount you owe to vendors or vendors for goods and services that you’ve already received but haven’t paid for yet. It’s usually one of the largest current liabilities for small businesses.
Impact: Accounts payable directly affects your operating cash flow. Delaying payments might give you temporary breathing room, but it can strain vendor relationships and lead to late fees or disruptions in supply.
2. Wages payable
These are wages you owe to employees for work they’ve already done but haven’t been paid for yet.
Impact: Unpaid wages affect your payroll and cash flow. If you miss a payment, it can lower employee morale or lead to compliance issues.
3. Notes payable
These include loans or lines of credit that you must repay within a year. This could be a business credit card, bank loan, or short-term financing.
Impact: Loan payments cut into your cash flow and affect how much you can spend elsewhere. You’ll also need to factor in interest costs.
4. Taxes payable
This includes sales tax, payroll tax, and income tax that your business owes but hasn’t paid yet.
Impact: Missing tax deadlines can lead to penalties or legal trouble. It’s smart to set aside funds, so you’re always ready to pay on time.
5. Dividends payable
If you’ve declared dividends to shareholders but haven’t paid them yet, that amount becomes a current liability.
Impact: Dividends aren’t tied to operations, but they do reduce your available cash and retained earnings. Make sure your business has the liquidity to meet these payments without affecting operations.
6. Unearned or deferred revenue
This is money you’ve collected from customers before you’ve delivered the product or service.
Impact: You can’t count this money as earned income yet. It stays on your books as a liability until you complete the work or deliver the product.
7. Interest payable
This represents the amount of interest that has accrued on loans or other borrowed funds but hasn’t been paid yet.
Impact: It adds to your costs and needs to be tracked carefully. If left unpaid, interest can grow and hurt your bottom line.
Examples of current liabilities
Not sure what counts as a current liability? Here’s a quick reference guide to help you sort it out.
Current liabilities vs noncurrent liabilities
Liabilities are what your business owes, but not all debts are created equal. The key difference comes down to timing:
- Current liabilities are short-term obligations due within 12 months or within your business’s operating cycle. Some obligations include accounts payable, wages payable, short-term loans, and taxes payable. They affect your day-to-day cash flow and are paid using current assets, like cash or accounts receivable.
- Noncurrent liabilities (also called long-term liabilities) are debts that don’t need to be paid for a year or more. These can include long-term loans, bonds payable, lease obligations, and mortgages. They don’t impact your immediate cash flow but are important for long-term planning.
Analyzing current liabilities
Analyzing your current liabilities is a way to see whether your business has enough cash or assets on hand to pay upcoming bills, make payroll, cover taxes, and handle short-term debt without running into trouble.
Here are a few key ways to evaluate your current liabilities and what they mean for your business:
Compare them to current assets
Comparing your current liabilities to your current assets is one of the simplest ways to assess your short-term financial health. If your assets (e.g., cash, inventory, or accounts receivable) are higher, you’re likely in a good position to pay off what’s coming due.
Use financial ratios
Two common tools for analysis are the current ratio and the quick ratio. Current ratio tells you how many times your current assets can cover your current liabilities, while the quick ratio removes inventory from the equation to show a more conservative view of liquidity.
Look at payment timelines
Knowing when each liability is due helps you prioritize what to pay first. If several debts are due around the same time, you’ll need to plan your cash flow carefully.
Watch for trends
If your current liabilities are growing faster than your current assets, it might be a cash flow issue. Consider tracking these changes month to month, so you spot problems early.
Plan for recurring vs. one-time liabilities
Some current liabilities, like wages or sales tax, show up regularly. Others, such as short-term loans, might be one-off expenses. Categorizing these can help with budgeting and financial forecasting.
Current liabilities on a balance sheet
Current liabilities are a key part of your business’s balance sheet. They show up on the right-hand side, under the liabilities section, and are usually listed at the top—right above noncurrent liabilities. You’ll usually see current liabilities listed in order of when they’re due.
You should review and update your current liabilities every time you close your books, whether that’s monthly, quarterly, or annually. But for better cash flow management, many small business owners update them weekly or biweekly, especially during busy or high-expense periods.
Ultimately, staying on top of this section helps you keep cash flow steady, avoid late payments, and prepare for taxes or loan applications.
Calculating current liabilities
When it comes to managing your business finances, knowing how to calculate current liabilities—and how to use them in key formulas—can help you stay ahead of your short-term obligations.
Here are three helpful ways to calculate and evaluate your current liabilities:
Current liabilities calculation
Current liabilities = Accounts payable + notes payable + accrued expenses + unearned revenue + short-term loans + other short-term liabilities
This formula helps you figure out your total current liabilities. You’ll usually find these numbers on your balance sheet or in your accounting software.
Use this when:
You want to see the full amount your business owes in the near term.
Current ratio
Current ratio = Current assets / current liabilities
This ratio shows if your business has enough short-term assets to cover its short-term debts. If the result is above 1, you’re likely in a safe spot. If it’s below 1, it could mean trouble ahead.
Use this when:
You want a quick check on your business’s short-term financial health.
Quick ratio (acid-test ratio)
Quick ratio = (Current assets - inventory) / current liabilities
This ratio leaves out inventory because it’s not always easy to turn into cash fast. It focuses on your most liquid assets, like cash and accounts receivable.
Use this when:
You want a more cautious look at how ready you are to cover what you owe, especially if you don’t sell inventory quickly.
Examples of calculating current liabilities
Let’s walk through a few simple examples using the formulas from the last section. These can help you figure out where your business stands and what actions to take next.
Example 1: Total current liabilities
Let’s say your business owes:
- $10,000 in accounts payable
- $2,000 in short-term loan payments
- $1,500 in wages payable
- $1,000 in sales tax
- $3,000 in unearned revenue
Total current liabilities = $10,000 + $2,000 + $1,500 + $1,000 + $3,000 = $17,500
That’s the total amount your business needs to pay within the next 12 months.
Example 2: Current ratio
Now, let’s say your current assets include:
- $8,000 in cash
- $6,000 in accounts receivable
- $4,000 in inventory
Current assets = $18,000
Current liabilities = $17,500 (from the example above)
Current ratio = $18,000 ÷ $17,500 = 1.03
A current ratio of 1.03 means you have just enough assets to cover your short-term debts. It’s a tight margin, so you might want to boost your cash reserves or cut down on expenses.
Example 3: Quick ratio (acid-test ratio)
This time, we’ll remove inventory from your assets:
Quick assets = $18,000 – $4,000 (inventory) = $14,000
Quick ratio = $14,000 ÷ $17,500 = 0.80
A quick ratio of 0.80 suggests your liquid assets aren’t enough to cover your short-term debts. That doesn’t mean you’re in danger, but it does mean you’ll want to manage cash flow carefully.
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