Current Liabilities FormulaLearn how to compute total current liabilities

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In my previous writing, we talked about the current assets formula.

How important it is for a business to have enough current assets to pay for all of its short-term obligations, or, as you would often see in a balance sheet, current liabilities.

Current liabilities are a business’s short-term debts which means that they are due within a year or a business’s normal operating cycle.

Since current liabilities are “currently” due, a business has to pay them off with “current” assets.

Being unable to pay for all current liabilities may mean that the business is having liquidity issues.

And that can be detrimental as it can disrupt the business’s operations.

Imagine being unable to pay your suppliers.

How about rent? Or the salaries and wages of your employees?

They all paint a picture of disrupted operations right? And that’s not good for any business!

It’s important for a business to know how many current liabilities it has.

By knowing the total amount of current liabilities it has, the business can assess if it has enough current assets to satisfy them all.

If the business has enough or more current assets to pay off current liabilities, then it won’t have any trouble paying off all of them.

It’s ideal for a business to have enough current assets that can generate a current ratio of 1.5 to 3.0 when compared with its current liabilities.

In this article, we will be learning the “current liabilities formula” and how you can use it for your business.

Also, we will be learning some of the different types of current liabilities that a business typically accumulates.

Lastly, we will be doing exercises to deepen our understanding of the “current liabilities formula”.

current liabilities formula

Current Liabilities Formula

Just like the current asset formula, the current liabilities formula is pretty simple.

But it will vary depending on what current liabilities the business has.

Let’s take a look at Facebook, Inc.’s current liabilities to illustrate:

From the illustration above, we can gather that Facebook, Inc. has the following current liabilities:

  • Accounts Payable
  • Partners Payable
  • Operating Lease Liabilities, Current
  • Accrued Expenses and Other Current Liabilities; and
  • Deferred Revenue and Deposits

With that, Facebook, Inc.’s current liabilities formula will be:

Current Liabilities = Accounts Payable + Partners Payable + Operating Lease Liabilities (Current) + Accrued Expenses and Other Current liabilities + Deferred Revenue and Deposits

Let’s use this formula to compute Alphabet Inc.’s total current liabilities:

Current Liabilities = Accounts Payable + Partners Payable + Operating Lease Liabilities (Current) + Accrued Expenses and Other Current liabilities + Deferred Revenue and Deposits

= $1,331,000,000 + $1,093,000,000 + $1,023,000,000 + $11,152,000,000 + $382,000,000

= $14,891,000,000

Based on what we’ve learned so far, the current liabilities formula is just a summation of all the business’s current liabilities.

This is why we can also refer to it as the total current liabilities. If we were to make a universal formula, it will look like this:

Current Liabilities = Current Liability A + Current Liability B +  Current Liability C + ….

The current liabilities formula, along with the current assets formula, will give you an idea of the business’s short-term financial health.

Ideally, the business’s total current liabilities should not exceed its total current assets.

This way, the business can be sure that it can pay for all of its current liabilities.

On the other hand, if the business has more current liabilities than current assets, it might indicate that the business is having liquidity issues.

What Are Current Liabilities?

Just knowing the current asset formula isn’t enough to fully understand it.

We need to understand what a current liability is too.

A current liability can either be:

  • A short-term financial obligation that is due within a year or a normal operating cycle
  • The portion of a long-term financial obligation that is due within the current year or accounting period

Current liabilities are financial obligations that the business has to address within the year.

A common example of a current liability is the “accounts payable” liability account.

When a business makes a credit purchase from a supplier, it accumulates a liability which is the accounts payable.

Typically, the business has to pay for its accounts payable within a year or a normal operating cycle.

Additionally, accounts payable are usually paid for with cash, a current asset.

Due to their fairly “urgent” nature, current liabilities will have to be settled using assets that can be reliably converted into cash within a year a.k.a. current assets.

Ideally, a business must have more current assets than current liabilities.

The business should have enough current assets that can generate a current ratio of 1.5 to 3.0 when compared with its current liabilities.

This way, the business can have enough current assets to pay off all current liabilities while still having some more in case of emergencies.

But not too much as to make the business inefficient in the utilization of its resources.

The analysis of a business’s current liabilities is important for external parties such as investors and creditors.

These external parties would want to know if they can get their money back before they extend credit to or invest in a business.

Creditors would want to know if the business can pay its obligations on time.

Accrued liabilities

Examples of Current Liabilities

Now that we have an idea of what makes a financial obligation a current liability, let’s take a look at some examples of current liabilities that a business typically accumulates:

Accounts Payable

When a business makes a credit purchase from a supplier, it accumulates a liability.

We refer to this liability as accounts payable.

Accounts payable is not limited to the purchase of goods.

A business can also accumulate it if it receives a service but hasn’t paid for it yet.

For example, Joey contracts Allen to perform cleaning services for his business on a certain date.

Allen successfully performs his cleaning services on the said date.

Allen bills Joey for the cleaning services he performed. Joey plans to settle the bill within 7 days.

In such a case, Joey accumulates account payable as he received a service but has yet to pay for it.

Another example, Layla purchases $5,000 of goods from Clint on credit.

Layla expects to receive the goods within 3 days. Layla is to pay Clint within 30 days.

In this case, when Layla receives the goods, she will accumulate accounts payable of $5,000.  

Accounts payable are usually due within a short amount of time, typically within a year or within the business’s normal operating cycle.

This is why they are current liabilities.  

Notes Payable

Notes payable refer to financial obligations that are represented by promissory notes.

A promissory note is a written promise that one party will pay another a certain amount at a certain date/s.

Notes payable typically include a due date for repayment, and may sometimes even include interest. In some cases, a creditor may require the debtor collateral.

Notes payable can be either current or non-current liabilities.

Those that are due within a year qualify as current liabilities. Those that aren’t are non-current liabilities.

Accrued Expenses

Accrued expenses refer to accumulated obligations for expenses that have become due but are still yet to be paid.  

For example, if rent becomes due but the business still has yet to pay for it, then the business accumulates an accrued expense.

When the business finally pays for these due but unpaid expenses, instead of debiting an expense account, the business will instead debit accrued expenses.

This is because the expense was already recognized when the business recorded accrued expenses.

The term “accrued expenses” is a blanket term.

It captures all of the due but unpaid expenses of a business.

It can be more specific such as Accrued Rent or Rent Payable for unpaid rent, or Salaries and Wages Payable for unpaid employee salaries and wages.

Accrued expenses are usually payable within a short amount of time, which qualifies them as current liabilities.

Unearned Revenue

Unearned revenue represents a business’s obligation to deliver goods and/or services for the payment that it has already received.

Unlike the previous current liabilities, unearned revenue isn’t typically paid with cash.

Rather, a business “pays” for unearned revenue by delivering goods and/or services.

For example, a customer contracts Kevin to perform repairs and maintenance services at a certain date.

The customer makes an advance payment of $5,000 for the whole service.

In this case, Kevin accumulates unearned revenue of $5,000.

He has the obligation to perform repairs and maintenance services at a certain date in exchange for the payment he received.

When he successfully performs said service, he then recognizes revenue.

Another example is a gift card.

When a customer purchases a gift card, s/he pays for the value of the gift card.

But since the gift card is yet to be consumed, the revenue attached to it is still yet to be earned.

Additionally, the business still has the obligation to honor the gift card.

Once the gift card is consumed, that’s the time when the business earns the revenue attached to it.

Short-term Loans

While loans are typically payable within a couple of years or more, some can be short-term.

These are loan obligations that are due within one year.

Short-term loans can also include lines of credit, unsecured short-term loans, or bank overdrafts that are due within one year.

The important factor here is that if a loan is due within a year, then it is a current liability.

Current Portion of Long-Term Debts

A portion of non-current liabilities or long-term debts eventually become due within the current accounting period.

This portion is what we refer to as the current portion of long-term debts.

Since this portion is due within a year, it qualifies as a current liability.

For example, Johnny enters into a loan contract of $50,000 that is due within five years.

Every year, Johnny has to repay $10,000 along with interest.

This annual obligation to repay $10,000 becomes a current liability in the year they are due.

Other Current Liabilities

If there is a liability or debt that is due within a year but does not belong to the prior examples of current liabilities, then they go to this account.

Some examples include credit card debt, dividends payable, reimbursable expenses, etc.

Current Liabilities Formula: Exercises

Exercise#1

Below is the consolidated balance sheet of Intel Corporation for the year ended December 26, 2020:

Our task is to compute Intel Corporation’s total current liabilities for the year ended December 26, 2020.

First, we need to identify Intel Corporation’s current liabilities before we can come up with its current liabilities formula.

Referring to the illustration above, we gather that it has the following current liabilities:

  • Short-term Debt
  • Accounts Payable
  • Accrued Compensation and Benefits; and
  • Other Accrued Liabilities

With the data we gathered, we come up with Intel Corporation’s current liabilities formula:

Current Liabilities = Short-Term Debt + Accounts Payable +  Accrued Compensation and Benefits + Other Accrued Liabilities

Now that we have our current liabilities formula, we can finally compute Intel Corporation’s total current liabilities for the year ended December 26, 2020:

Current Liabilities = Short-Term Debt + Accounts Payable +  Accrued Compensation and Benefits + Other Accrued Liabilities

= $2,504,000,000 + $5,581,000,000 + $3,999,000,000 + $12,670,000,000

= $24,754,000,000

As per our computation, Intel Corporation’s total current liabilities amount to $24,754,000,000.

Just to make sure, let’s check if our computation is correct:

Highlighted in green is the figure for total current liabilities that appears in the consolidated balance sheet of Intel Corporation for the year ended December 26, 2020.

It states $24,754,000,000 which is equal to our computation.

Comparing Intel Corporation’s total current liabilities of $24,754,000,000 to its total current assets, of $47,249,000,000, we can see that it has more current assets than current liabilities.

Comparing the two figures, we can get a current ratio (current assets ÷ current liabilities) of 1.91.

This means that Intel Corporation won’t be having any liquidity issues if they maintain the same level of current assets and current liabilities.

Exercise#2

Henry owns a business.

His business has the following liabilities:

Additional data were gathered regarding the business’s liabilities:

  • Only $88,000 of notes payable are due within the year.
  • The business has rent due of $12,000. As of date, it is still yet to be paid. Also, it has yet to be recorded in the books of the business.
  • $200,000 of loans payable is due within the year.

From the data above, we can gather that the business has the following current liabilities:

  • Accounts Payable
  • Notes Payable
  • Accrued Expenses
  • Short-Term Loans
  • Unearned Revenue; and
  • Loans Payable (current potion)

Usually, loans payable are non-current liabilities.

But since we have data that $200,000 of loans payable are due within the year, then that portion of the loans payable qualifies as current liabilities.

Only $88,000 of notes payable qualify as current liabilities.

As the additional data states, only this amount of notes payable are due within the year.

The rest are non-current liabilities.

Lastly, there is an unrecorded accrued expense.

The rent of $12,000 is due but is still unpaid.

This makes it an accrued expense, and as such, we need to add it to the accrued expenses account:

Accrued Expenses = $412,700 + $12,000

= $424,700

With the data we gathered, we come up with the business’s current liabilities formula:

Current Liabilities = Accounts Payable + Notes Payable + Accrued Expenses + Short-Term Loans + Unearned Revenue + Loans Payable (current portion)

With this formula, let’s compute the business’s total current liabilities:

Current Liabilities = Accounts Payable + Notes Payable + Accrued Expenses + Short-Term Loans + Unearned Revenue + Loans Payable (current portion)

= $675,000 + $88,000 + $424,700 + $212,500 + $70,800 + $200,000

= $1,671,000

As per our computation, Henry’s business has total current liabilities of $1,671,000.

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  1. Eastern Connecticut University "What are the 11 Basic Accounting Formulas?" Page 1 - 2. February 23, 2022

  2. Texas Southern University "Financial Analysis" Page 1 - 8. February 23, 2022