Current liabilities are financial obligations that must be paid by a firm in less than one year. They can include accounts payable, unearned revenue and short-term debt. Current liabilities appear on a firm's balance sheet.
A firm's balance sheet illustrates its financial state at a given time. The main components of the balance sheet are assets, liabilities and owner's equity. Assets are things of value that the firm owns or is owed. Liabilities are financial obligations that the firm owes. Owner's equity is the amount of investment that a firm's owners have in the company.
Asset are divided into current and long-term assets. Similarly, liabilities are separated into current liabilities and long-term liabilities. Accounts payable are general business expenses such as rent, lease payments and payroll; they typically make up the largest current liability. Short-term debt includes loans and lines of credit. Unearned revenue is money that has been received from customers before the firm has provided a good or service.
The current ratio, which is the ratio of current assets to current liabilities, is used to analyze the firm's ability to meet its immediate financial obligations. A ratio of greater than one means that the company has more than enough current assets to meet current liabilities. A ratio of one signifies equal current assets and current liabilities. A ratio of less than one means fewer current assets than current liabilities and often signals financial distress.