Current Ratio: What It Is, Formula and Examples

Lauren McKinley is a financial professional with five years of experience in credit analysis, commercial loan administration, and banking operations. She has worked at regional lending institutions across the Northeast, evaluating risk, analyzing financials, and managing loan processes. Specializing in commercial real estate and small business financing, Lauren has helped diverse borrowers navigate financial solutions. If you have taken out a long-term loan, such as a 25-year commercial real estate loan, amounts that are due within the next 12 months are still considered a current liability. This is typically the sum of principal, interest, loan fees, or balloon portions of the loan.

Company Overview

These are often settled using current assets, such as cash, bank balances, or customer payments due shortly. In most cases, companies are required to maintain liabilities for recording payments which are not yet due. Again, companies may want to have liabilities because it lowers their long-term interest obligation. Investors and creditors analyze current liabilities to understand more about a company’s financials. Banks, for example, want to know before extending credit whether a company is collecting—or getting paid for—its accounts receivable in a timely manner. Both the current and quick ratios help accounting for product warranties with the analysis of a company’s financial solvency and management of its current liabilities.

As a result, many financial ratios use current liabilities in their calculations to determine how well—or for how long—a company is paying down its short-term financial obligations. The current ratio is a quick measure of a business’s ability to pay down its debts by looking at its current assets and current liabilities. The current liabilities section of a balance sheet shows the debts a company owes that must be paid within one year. These debts are the opposite of current assets, which are often used to pay for them. Several liquidity ratios use current liabilities to determine a company’s ability to pay its financial obligations as they come due.

Accounts payable is a liability, not an asset, as it represents outstanding payments a company owes to suppliers. Managing AP efficiently is crucial for maintaining cash flow, supplier relationships, and financial stability. Businesses can leverage accounts payable automation tools to optimize processes and reduce errors. The current ratio (or working capital ratio) is a financial metric that measures the business’s ability to pay down its debts by looking at its current assets and current liabilities. One popular metric to help gauge a company’s financial health is the current ratio, which is a ratio of the company’s current assets to its current liabilities. In a nutshell, if a company has enough available assets to cover its financial obligations that will come due within the next year, it is a sign of financial strength.

Accrued Payroll

Examples of current liabilities include accounts payable, wages payable, taxes payable, and short-term loans. To account for non-current liabilities, a company must record them on their balance sheet, a financial statement listing a company’s assets, liabilities, and equity. The non-current liabilities section of the balance sheet typically appears below the current liabilities section and includes all of the company’s long-term debts and obligations. To account for current liabilities, a company must record them on its balance sheet, a financial statement listing a company’s assets, liabilities, and equity. The current liabilities section of the balance sheet typically appears at the top and includes all of the company’s short-term debts and obligations.

Financial Close & Reconciliation

Using accounts payable automation software can streamline invoice processing and payments, reducing errors and improving efficiency. For example, if you have a target ratio of 2.0 with $25,000 in current assets and $10,000 in current liabilities, you could spend $5,000 while still hitting your current ratio target. The current ratio provides a general picture, but you should also be mindful of your cash flow management to understand when cash is entering and exiting the business.

You usually can find a detailed listing of what these other liabilities are somewhere in the company’s annual report or 10-K filing. Use a dynamic schedule or dashboard to track due dates, amounts, and payment statuses. Facebook’s accrued liabilities are at $441 million and $296 million, respectively. Below are some of the highlights from the income statement for Apple Inc. (AAPL) for its fiscal year 2024.

The emphasis on both is to look at things that only affect the short-term (next 12 work in process inventory example months) operations of the business. For any long-term debts, it’s optional to include the current component of that debt (i.e. the next 12 months of payments). Current liabilities are what the business owes that are due to be paid back within a year. Common examples include accounts payable, tax payable, and salary or wages owed. For example, if a business has current assets of $15 million and current liabilities of $10 million, it will have a current ratio of 1.5.

Notice I said that these debts must be paid in full in the current period. Debts with terms that extend beyond the next 12 months are not considered short-term liabilities. Current liabilities refer to debts or obligations a company is expected to pay off within a year or less. These short-term liabilities must be settled shortly, typically within a year or less.

IRS Rules on Multiple Payment Plans

If you owe $10,000 or less (excluding penalties and interest), you likely qualify for this.
Common examples include accounts payable, tax payable, and salary or wages owed.
Lower turnover might indicate cash flow issues—or, alternatively, strong negotiation terms.
It can be considered as “prepayment” for products or services that will be supplied in the future.
In that case, it may face financial difficulties, which can harm its reputation and ability to secure financing in the future.
Contract liabilities can be either current or non-current liabilities, depending on the timing of when the contract is expected to be fulfilled.

A non-current portion of loans scheduled to be paid in more than 12 months from the reporting date is treated as non-current liabilities in the balance sheet. It is important to note that the loan payable is classified into current and non-current liabilities. The current portion of loans expected to be paid within 12 months from the reporting date is classified as current liabilities. + Liabilities included current and non-current liabilities that the entity owes to its debtors at the end of the balance sheet date.

Cash

To record current liabilities, a company debits the appropriate liability account and credits the account used to incur the liability. For example, if a company owes $10,000 to a supplier for inventory purchases, the company would debit accounts payable for $10,000 and credit inventory for $10,000. Current liabilities are financial obligations a company must settle within the next 12 months, or within its normal operating cycle—whichever is longer.

Key examples of current liabilities include accounts payable, which are generally due within 30 to 60 days, though in some cases payments may be delayed.
This is greater than 1, so it indicates that Disney’s financial condition is solid, at least on a near-term basis.
Liquidity refers to how easily the company can convert its assets into cash in order to pay those obligations.
There’s much to learn from tracking the current ratio, but only if the current assets and current liabilities are correctly categorized.
The primary goal of managing current liabilities is to ensure that a business has sufficient liquidity to pay off these debts without impacting its ongoing operations.
Simply put, the higher the debt to equity ratio, the greater the concern about company liquidity.

They change frequently and respond to business activity, market conditions, and operational decisions. Monitoring them isn’t about “tracking bills”—it’s about protecting liquidity and enabling smart decision-making. In some cases, you may need or want to know the average of your current liabilities over a certain time frame. Accounts Payable is usually the major component representing payment due to suppliers within one year for raw materials bought, as evidenced by supply invoices. The three types of liabilities are current, non-current liabilities, and contingent liabilities.

This is greater than 1, so it indicates that Disney’s financial condition is solid, at least on a near-term basis. To calculate current liabilities, sum all short-term obligations, including accounts payable, short-term loans, taxes payable, and other similar debts. The types of current liability accounts used by a business will vary by industry, applicable regulations, and government requirements, so the preceding list is not all-inclusive.

The natural balance of a current liability account is a credit because all liabilities have a natural credit balance. The timing of journal entries related to current liabilities varies, but the basics of the accounting entries remain the same. When a current liability is initially depreciation of assets recorded on the company’s books, it is a debit to an asset or expense account and a credit to the current liability account. Now that you know what current liabilities are, how to calculate them, and what they look like on your balance sheet, you can determine your ability to meet short-term obligations due within a year. Knowing this figure can help you gauge the financial health of your business and improve your ability to obtain financing opportunities.

Understanding Short-Term Debt

Contract liabilities can be either current or non-current liabilities, depending on the timing of when the contract is expected to be fulfilled. Current liabilities should be viewed alongside receivables and inventory. Smart working capital management means balancing outflows and inflows without relying on emergency funding.

The debt-to-equity ratio is useful for quick financial assessments, while the gearing ratio offers deeper insights for long-term planning. In most cases, the IRS does not allow taxpayers to have more than one active installment agreement at the same time. If you have a new tax debt while already on a payment plan, the IRS will not create a second one. Instead, they will expect you to modify your existing agreement to include the new balance. If you owe more than $50,000, or you cannot pay within the time limits of the streamlined plan, you will need a non-streamlined agreement.

Current liability

If your debt is higher or your situation is more complex, you will need to file Form 9465 and possibly Form 433-F or 433-A, depending on your financials. Trying to stack them or failing to update your existing plan can lead to default and additional penalties. It can take a few days to several weeks, depending on the method you use and whether financial documents are required. Whether you are reviewing an existing agreement or starting from scratch, the IRS has options. If you are unsure where to start, professional help is just a call away. If you are going through a tough time (like job loss, medical issues, or a major financial setback), you might be eligible for Currently Not Collectible status.