Before learning about current liability in detail we have to understand what is a liability?
In financial accounting, liability is defined as the future sacrifice of economic benefit that the entity is obliged to make to other entities as a result of part transactions for other part events the settlement of which may result in the transfer or use of assets, provisions of service or another yielding of economic benefits in the future.
In simple words, the liability is what we owe and have to liquefy it by money, asset, goods or provides service. Now let's talk about current liability.
What is Current Liability?
In accounting, Current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm which were period is longer.
In one line we can say current liabilities is that amount that is due to be paid to creditors within 12 months.
We can also classify current liability with four conditions which are:-
Liability is expected to be settled in the company’s normal operating cycle or
Due to being settled within 12 months after the reporting date or
Held primarily to be traded or
There is no unconditional right to defer settlement for at least 12 months after the reporting date.
If a liability meets any of the above four conditions then it can be classified as a current liability.
We always talk about the operating cycle but what is the operating cycle? How can we define organizations operating cycle? check out our article about the operating cycle.
Schedule III of the companies act 2013 prescribed that current liabilities shall be classified into
Short term borrowings
Trade payable
Other current liabilities
Short term provisions
Short term borrowings: Short term borrowings are borrowings of the company which is due for payment within 12 months from the date of the balance sheet or within the period of the operating cycle. Whether borrowing is short term borrowing is determined on the date of borrowing. Accordingly, loans that are repayable on demand or within 12 months from the date of the balance sheet or within the period of the operating cycle are classified or shown as short-term borrowings. Each short-term borrowing is disclosed or shown in the notes to accounts for short-term borrowings. The items included are:
Loan repayable on demand
Bank overdraft or cash credit from Bank
Loans from other parties repayable within 12 months from the date of the loan
Deposits and
Other loans and advances (nature to be specified).
Trade payables: The term trade payables are defined in schedule III of the companies act 2013 as the amount payable against the purchase of goods or services is taken in the normal course of business. It includes both sundry creditors and bills payable. Thus, a liability on account of a transaction that is not the normal business of the company is not shown as trade payables. For example, a trading company sells its fixed asset through an agent. The agent is to be paid rupees 10000 as a fee. Rupees 10000 will be shown as other current liabilities and not trade payables.
Other current liabilities: All current liabilities that are not short-term borrowings or trade payables are classified or shown as other current liabilities. These include:
Current maturities of long-term debts: Current maturities of long-term debt, i.e., amount due to be paid within 12 months of the date of balance sheet or within the period of operating cycle out of the long term, borrowings are classified or shown as current maturities of long-term debts.
Interest accrued but not due on borrowings: Interest accrued but not due means interest is provided in the books of account but it has not become due for payment. For example, interest is payable half-yearly in June and December. if the company closes its book on 31st March it will provide the interest for the quarter of January to March following the Accrual concept of accounting. but the interest will become due for payment on 13 June along with the interest for the quarter April to June. The interest for the quarter January to March will be classified as ‘Interest accrued but not due.
Interest accrued and due on borrowings: Interest accrued and due to means, the interest is provided in the books of account and due for payment. In the above example interest for the half-year, June to December is provided in the books of account but has not been paid. It is ‘Interest accrued and due’ and shown as other current liability. Remember: Interest accrued and due and interest accrued but not due on borrowings are shown as other current liabilities.
Income received in advance: income received in advance means advance received by the company against which sale is yet to be made and/or service are yet to be rendered. Since the income has not been earned, i.e., sales made or service rendered, it is shown as ‘Other Current Liabilities’, and when it is earned it is transferred to income.
Unpaid dividend: unpaid dividends are dividends declared but they remain unclaimed by the shareholders.
Application money received for allotment of securities and due for refund and interest due thereon: The amount received by the company as application money for allotment of shares and the company decides not to allot shares to applicants or minimum subscription is not received, the application money becomes refundable. The amount refundable along with interest, if any, is classified or shown as ‘Other Current Liabilities’ under current liabilities in the notes to account for other current liabilities.
Unpaid matured deposits and interest accrued thereon.
Unpaid matured debentures and interest accrued thereon.
Calls-in-advance: The amount received in advance for which call has not been made in calls-in-advance. It is shown as ‘Other Current Liabilities’ under current liabilities in the note to accounts and other current liabilities.
Outstanding expenses: Outstanding expenses are expenses that remain unpaid at the end of the year. These are accounted for in the books of account following the matching concept.
Other payables (Nature to be specified): Other payables include any other liability that is due for payment within 12 months from the date of the balance sheet or within the period of the operating cycle whichever is longer. Examples are Outstanding expenses, Provident fund payable, ESI payable, Balance in output CGST, Output SGST, Output IGST, etc.
Short term provisions: Provision is the amount set aside to meet the future liability, the amount of which is not determined but estimated. Provisions like liability can be long term (Non-current) provisions and short term (Current) provisions. Short term provisions are the provisions for liabilities that are likely to be paid within 12 months from the date of the balance sheet or within the period of the operating cycle, whichever is longer. For example, provision of telephone expenses, Provision for electricity, Provision for employee benefit (For employees who will retire within 12 months of the date of the balance sheet throughout the operating cycle whichever is longer), provision for tax, etc., are short term provisions. Each item of the short-term provision is disclosed or shown separately in the notes to accounts on short term provisions, which are totalled and a single amount is shown against short term provisions in the balance sheet.
Short term provisions are classified into:
Provision for employees’ benefits;
Provision for expenses
Provision for tax and
Other provisions
Hope this will help you with all your queries for current liabilities, if any query is not cleared pls comment below and we will try to solve it ASAP. Thank you for reading this and have a nice day.
Here are some books available on amazon to increase your knowledge about liabilities.
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