Current liabilities (definition)
Current liabilities are the debts a business owes and must pay within 12 months.
When a business makes a purchase on credit, incurs an expense (like rent or power), takes a short-term loan, or receives prepayment for goods or services, those become current liabilities until they are made good.
Accounts payable – which is money owed to suppliers – tends to be the largest current liability a small business has.
Examples of current liabilities
Current liabilities examples are:
- short-term debt such as credit card
- accounts payable (which are amounts owed to suppliers)
- wages owed to employees or contractors
- income and VAT owed
- pre-sold goods and services that you have agreed to deliver at a future time
Current liabilities in accounting
Current liabilities are important to a business’s liquidity. Liquidity is commonly calculated by dividing current assets by current liabilities. This produces a number known as the current ratio. A current ratio higher than one is generally preferred because it indicates the business can comfortably meet its upcoming expenses.
Lenders also look at a business’s current liabilities to predict if they can repay a loan.
See related terms
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.