An Introduction to the Balance Sheet: Current Liabilities

This article is the fourth week’s lesson in the ModernGraham Academy beginner’s course, An Introduction the the Balance Sheet.  The ModernGraham Academy is a place to learn about the basics of investing, with an emphasis on the ModernGraham approach.

This course will be a detailed look at the balance sheet, starting with a basic overview, then a look at each part of the statement individually, and finishing up with a review and some final comments.

An assignment is given each week; if the assignment is completed before the next week’s lesson and emailed to ben AT moderngraham.com (replace the “AT” with @), feedback will be provided.

What are Current Liabilities?

Current Liabilities are the debts a company owes that are due within one year.  These are the things a company must be able to repay in the very near future and can have a direct impact on the cash available for reinvestment.

Here are some of the main types of current liabilities, and some things to consider about each type.

• Accounts Payable – Accounts payable are debts owed in the 30 to 60 day time frame, and typically include payments for things purchased from vendors.
• Current Payments Due on Long-term Debt – Clearly, this includes any payments due on a long-term debt obligation.  For example, if a company borrows $100,000 at 8% interest, then the $8,000 interest payment will appear as a current liability.
• Dividends Payable – If the company has declared a dividend, then the amount of cash needed to supply the dividend will appear as a current liability, because it is then money owed to shareholders.
• Income Tax Payable – This one is self-explanatory, but it is the amount of income tax the company must pay in the next twelve months.
• Payroll Liabilities – Assuming a company operates using the accrual accounting method (almost all of them do), then any payroll obligations that have accrued but have not yet been paid will appear as a current liability.
• Short-term Notes – If a company has a cash flow issue, it may need to take out a short-term borrowing obligation.  This is also called a working capital loan.
• Unearned Revenue – Another product of the accrual-based accounting method, this category of current liabilities consists of revenue that has been paid to the company but has not yet been earned.  Since the company hasn’t earned the money, it is considered a liability rather than an asset.

Homework

This week, please discuss the following question with a one paragraph response in a comment to this post:  How could a large amount of current liabilities affect a company’s ability to earn a profit?

An Introduction to the Balance Sheet Course Overview

• Week 1: What is it, Why is it important, and Where can it be found?
• Week 2: Current Assets
• Week 3: Non-current Assets
• Week 4: Current Liabilities
• Week 5: Non-current Liabilities
• Week 6: Equity
• Week 7: Key Issues and Review
• Week 8: Final Comments

Photo provided by iBoy_Daniel