Which of the following accounts could not be classified as a current liability

A current liability is an obligation that is payable within one year. The cluster of liabilities comprising current liabilities is closely watched, for a business must have sufficient liquidity to ensure that they can be paid off when due.  All other liabilities are reported as long-term liabilities, which are presented in a grouping lower down in the balance sheet, below current liabilities.

In those rare cases where the operating cycle of a business is longer than one year, a current liability is defined as being payable within the term of the operating cycle. The operating cycle is the time period required for a business to acquire inventory, sell it, and convert the sale into cash. In most cases, the one-year rule will apply.

Since current liabilities are typically paid by liquidating current assets, the presence of a large amount of current liabilities calls attention to the size and prospective liquidity of the offsetting amount of current assets listed on a company's balance sheet. Current liabilities may also be settled through their replacement with other liabilities, such as with short-term debt.

Accounting for Current Liabilities

The initial entry to record a current liability is a credit to the most applicable current liability account and a debit to an expense or asset account. For example, the receipt of a supplier invoice for office supplies will generate a credit to the accounts payable account and a debit to the office supplies expense account. Or, the receipt of a supplier invoice for a computer will generate a credit to the accounts payable account and a debit to the computer hardware asset account.

Current Liability Usage in Ratio Measurements

The aggregate amount of current liabilities is a key component of several measures of the short-term liquidity of a business, including:

• Current ratio. This is current assets divided by current liabilities.

• Quick ratio. This is current assets minus inventory, divided by current liabilities.

• Cash ratio. This is cash and cash equivalents, divided by current liabilities.

For all three ratios, a higher ratio denotes a larger amount of liquidity and therefore an enhanced ability for a business to meet its short-term obligations.

Examples of Current Liabilities

The following are common examples of current liabilities:

• Accounts payable. These are the trade payables due to suppliers, usually as evidenced by supplier invoices.

• Sales taxes payable. This is the obligation of a business to remit sales taxes to the government that it charged to customers on behalf of the government.

• Payroll taxes payable. This is taxes withheld from employee pay, or matching taxes, or additional taxes related to employee compensation.

• Income taxes payable. This is income taxes owed to the government but not yet paid.

• Interest payable. This is interest owed to lenders but not yet paid.

• Bank account overdrafts. These are short-term advances made by the bank to offset any account overdrafts caused by issuing checks in excess of available funding.

• Accrued expenses. These are expenses not yet payable to a third party, but already incurred, such as wages payable.

• Customer deposits. These are payments made by customers in advance of the completion of their orders for goods or services.

• Dividends declared. These are dividends declared by the board of directors, but not yet paid to shareholders.

• Short-term debt. This is loans that are due on demand or within the next 12 months.

• Current maturities of long-term debt. This is that portion of long-term debt that is due within the next 12 months.

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. However, the list does include the current liabilities that will appear in most balance sheets.

Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle. An operating cycle, also referred to as the cash conversion cycle, is the time it takes a company to purchase inventory and convert it to cash from sales. An example of a current liability is money owed to suppliers in the form of accounts payable.

Key Takeaways

• Current liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle.
• Current liabilities are typically settled using current assets, which are assets that are used up within one year.
• Examples of current liabilities include accounts payable, short-term debt, dividends, and notes payable as well as income taxes owed.
• The analysis of current liabilities is important to investors and creditors. This can give a picture of a company’s financial solvency and management of its current liabilities.

  Which of the following accounts is not to be classified as a current liability?

  Answer and Explanation: Correct Answer: Option c) Contingent liabilities. Accounts payable represent a current liability repaid within a year. Accrued liabilities are due within a year and hence considered current liabilities.

  Which is not following is not a current liability?

  The answer is d. Bonds payable is a non-current liability, not current liability, because it is payable after one accounting period. Salaries and wages payable, accounts payable, and taxes payable are current liabilities because these would be due within one accounting period.

  What are 3 examples of a current liability?

  Examples of current liabilities include accounts payables, short-term debt, accrued expenses, and dividends payable.