Current Liabilities

Current liabilities are obligations that will be settled through the use of current assets or by the creation of other current liabilities.

Examples of current liabilities include:

• Accounts payable and trade notes payable due to suppliers for purchase of goods and services.
• Cash dividends payable.
• Contract liabilities representing an entity’s obligation, the revenue recognition standard, to transfer goods or services to a customer for which the entity has received consideration from the customer. Contract liabilities may be current liabilities or non-current liabilities or both, depending on the facts and circumstances such as when the entity expects to satisfy its performance obligations and how it satisfies its performance obligations—over time or at a point in time.
• Other deposits received from customers such as a security deposit on a lease.
• Agency collections such as employee tax withholdings and sales taxes, where the company acts as agent for another party (the government) and is obligated to remit the payments.
• Obligations due on demand according to their terms, such as demand notes.
• Short-term (30-, 60-, 90-day) notes.
• Current portions of long-term debt and lease liabilities (the portions of the principal due within the operating cycle, usually twelve months).
• Taxes payable, wages payable, and other accruals.
• Long-term obligations callable at the balance sheet date due to some violation by the company such as a violation of a loan covenant.
• Assurance-type warranties10 for which the term of the warranty extends only into the next accounting period or the portion of a longer-term warranty that extends only into the next period.

Current liabilities do not include:

• Debts to be paid by funds in accounts classified as non-current.
• The portion of a short-term obligation intended to be refinanced by a long-term obligation, subject
  to fulfilling requirements as noted below.

If the company can demonstrate that it has the intent and the ability to refinance an obligation that is coming due in the next twelve months, it may reclassify that obligation on the balance sheet as a non-current liability. Having a commitment from a bank for long-term financing of the obligation is an example of a way to demonstrate the ability to refinance it.

For example, when a company can show that it has the intent and the ability to refinance an obligation that is due in nine months, the company can show the obligation on its balance sheet as a non-current liability because management knows it will use the funds received from the future long-term financing to settle the existing debt. The company is replacing one kind of debt with another kind of debt.

Bank Overdrafts: An Item That Could Be Reported by Netting Against the Current Asset “Cash” or by
Adding to the Current Liability “Accounts Payable”

Bank overdrafts are amounts by which a company’s checking account is in a negative position due to checks written that exceed the amount in the account. The management of the bank has discretion over whether a non-sufficient funds check will be honored, allowing the overdraft, or whether the non-sufficient funds check will be returned to the payee unpaid. If the bank honors the check and allows the overdraft in the payor’s account, the overdraft amount should be added to the payor’s accounts payable and reported as a current liability, unless the payor has cash in an amount greater than the overdraft in another account in the same bank. If enough cash is present in another account in the same bank, the net amount of cash available (the positive balance minus the negative balance) in that bank should be reported as part of cash, a current asset.