Back to Basics, Part 5
Current liabilities are the debts and obligations that a company must
pay within one year. These are short-term debts that arise from the
purchase of current assets and include the portion of long-term liabilities
due within the next 12 months. Current liabilities are bills due and
IOUs hanging over a company's head. Despite this, for a large part,
current liabilities are assets.
We all know that cash is good, that cash is king, and as a company, the best
place for that cash is in our hands, ready to do our bidding. The longer we can
keep that cash in our grubby little mitts, the better. By delaying the payment
of short-term obligations, we have more cash available to run and grow our business.
There are five main categories of current liabilities that you'll find on the
Accounts Payable are current liabilities incurred in the normal
course of business. It's the money owed to partners and suppliers, with payment
due at a later date. If cash is used for a purchase, the purchase will not
add to accounts payable.
By delaying the payment of accounts payable, a company can increase the current
assets available and provide a short-term boost to earnings. The payment's due?
No problem. The check's in the mail (wink, wink).
While putting off accounts payable is generally a good thing, beware of accounts
payable growth disproportionate to growth in sales and cash flow. If accounts
payable increases more quickly than cash and current assets, the firm's liquidity
and ability to meet short-term obligations decreases.
Accrued Expenses are debts that are incurred by a company,
but for which payment has not yet been made. These are normally periodic expenses
such as wages, interest, and taxes that have not yet come due. From the time
the expenses are incurred until the date they are due, they accumulate on the
balance sheet as accrued expenses.
Like accounts payable, accrued expenses are generally a "good" liability,
often looked at as free short-term financing. However, accrued expenses are not
always an example of a company taking its time to pay its creditors. They may
merely be an estimate of future expenses or might just represent money owed to
employees. Not all accrued expenses are assets and those expanding on a balance
sheet should be viewed through relatively skeptical lenses.
Income Tax Payable is the tax a company accrues over the year
that it has yet to pay. Corporations make payments on taxes throughout the
year based on its estimated taxable income. Generally a company must make installments
totaling 90% of estimated taxes due to avoid penalties. Income tax payable
is the portion of taxes due but not yet paid.
Short-Term Notes Payable are various kinds of current interest-bearing
debt that are accompanied by specific borrowing terms. Most companies will
list in a footnote to this item when this debt is due and what interest rate
the company is paying.
Long-Term Debt Payable is the portion of noncurrent debt that
will come due within the year. This might seem confusing since it's long-term
debt in the current liabilities section, but because it will be due within
one year of the report, it will be paid currently.
>> Noncurrent Assets >>