Table Of Contents
Current Liabilities Formula Explained
Current liabilities formula is used by businesses and corporations to determine its immediate financial obligations arising through business activities. These expenses or outstanding payments are usually met through the use of current assets.
Current liabilities are those liabilities for which the company is liable within a time frame of one year. It is the amount that is generally concerned for a particular business cycle. Current liabilities items are usually those attached to a company's trading securities of a company.
Some most common line items for current liabilities are notes payable, accounts payable, accrued expenses, unearned revenue, current portion of long term debt, and other short term debt.
Formula
Current liabilities are those line items of the balance sheet that are liable to the company within a year. The calculation for the current liabilities formula is relatively simple. It is a summation of all the current liabilities of the company. The current liabilities are notes payable, accounts payable, accrued expenses, unearned revenue, current portion of long-term debt, and other short-term debt.
Mathematically, the Current Liabilities Formula is represented as,
Current Liabilities formula = Notes payable + Accounts payable + Accrued expenses + Unearned revenue + Current portion of long-term debt + other short-term debt.
How To Find?
Current liabilities are a culmination of different types of expenses that have to be settled within one year since the invoice was raised. Therefore, it completely depends on the urgency of a particular type of liability and the nature of business.
For example, a business might want to pay out their short-term loan quicker and pay their suppliers slightly later as the interest rates on such loans are usually higher.
However, to find the total current liabilities formula, the management must sit down with their accountant to gather data for all their obligations within the year to schedule payments for each of them as per priority.
Examples
Let us understand the concept of net current liabilities formula with the help of a few examples. These examples will help us understand the intricate details of the concept.
Example #1
A simple example of the current liabilities lets us consider an arbitrary company. To calculate the total current liabilities of company A. We need to assume the values for the different line items for that company, the summation of which will give us the total current liabilities for that company.
Use the following data for the calculation of the Current Liabilities Formula.
Now, let us do the calculation of the Current Liabilities formula based on the given information,
- Total Current Liabilities = $150+$210+$50+$100+$55+$50
Current Liabilities will be -
- Current Liabilities = $615
The total current liabilities for company A, in this case, are $615. It implies the company is liable for $615 within one year. It is the amount that is generally concerned for a particular business cycle. Current liabilities items usually are those which are attached to the trading securities of a company.
Current liabilities are always looked upon concerning the current assets. Current liabilities are used to calculate the current ratio, which is the ratio of current assets and current liabilities. Current is also used in calculating working capital, which is the difference between current assets and current liabilities.
Example #2
Current liabilities of Reliance Industries. To calculate the total current liabilities of reliance industries, we need the values for the different line items for that company, the summation of which will give us the total current liabilities for that company. Below is the presentation of different line items of reliance industries for the period of March 2018 and the total current liability for reliance industries for that period.
Use the following data for the calculation of the Current Liabilities Formula.
Now, let us do the calculation of the Current Liabilities formula based on the given information,
- Total Current Liabilities=$15,239+$88,675+$85,815+$918
Current Liabilities will be -
Current Liabilities = $190,647
The total current liabilities for the reliance industries are Rs 190,647 cr. It implies the company is liable for Rs 190,647 cr within one year. It is the amount that is generally concerned for a particular business cycle. Current liabilities items are usually those attached to a company's trading securities. Current liabilities are always looked upon concerning the current assets. The total current assets for reliance industries for the period are Rs 123,912cr.
Generally, the current asset is higher than the current liability. But in some cases, like for reliance industries, if it is the opposite, it may signal that the company can negotiate better with its creditors. Current liabilities are used to calculate the current ratio, which is the ratio of current assets and current liabilities. Current is also used in calculating working capital, which is the difference between current assets and current liabilities. In the case of reliance industries, the working capital is negative.
Example #3
Current liabilities of Tata Steel. To calculate the total current liabilities of Tata steel, we need the values for the different line items for that company, the summation of which will give us the total current liabilities for that company. Below is the presentation of different line items of reliance industries for the period of March 2018 and the total current liability for reliance industries for that period.
Use the following data for the calculation of the Current Liabilities Formula.
Now, let us do the calculation of the Current Liabilities formula based on the given information,
- Total Current Liabilities=$669+$11,242+$12,959+$735
Current Liabilities will be -
Current Liabilities = $25,605
The total current liabilities for Tata Steel for the period are Rs25,607 cr. It implies the company is liable for Rs25,607 cr within one year. It is the amount that is generally concerned for a particular business cycle. Current liabilities items usually are those which are attached to the trading securities of a company.
Current liabilities are always looked upon concerning the current assets. The total current assets for Tata steel for the period are Rs 34,643. Current is used in calculating working capital, which is the difference between current assets and current liabilities. Tata Steel has a positive working capital, which is common.
Importance
Let us understand the importance of the total current liabilities formula through the discussion below.
Current liabilities are always looked upon concerning the current assets. Current liabilities are used to calculate the current ratio, which is the ratio of current assets and current liabilities. Current liabilities are also used in calculating working capital, which is the difference between current assets and current liabilities.
Generally, the current assets are higher than those of a company's current liabilities. It is common to have a current ratio of 1.5 to 2. Working capital is generally positive values; otherwise, it may signify that the company is running with the help of higher short-term debt.
