To determine the appropriate classification of specific financial instruments, companies need proper definitions of assets, liabilities, and equities. They often use the conceptual framework definitions as the basis for resolving controversial classification issues.

Because liabilities involve future disbursements of assets or services, one of their most important features is the date on which they are payable. A company must satisfy currently maturing obligations in the ordinary course of business to continue operating. Liabilities with a more distant due date do not, as a rule, represent a claim on the company’s current resources. They are therefore in a slightly different category. This feature gives rise to the basic division of liabilities into (1) current liabilities and (2) long-term debt.

Recall that current assets are cash or other assets that companies reasonably expect to convert into cash, sell, or consume in operations within a single operating cycle or within a year (if completing more than one cycle each year). Current liabilities are “obligations whose liquidation is reasonably expected to require use of existing resources properly classified as current assets, or the creation of other current liabilities.” [2] This definition has gained wide acceptance because it recognizes operating cycles of varying lengths in different industries. This definition also considers the important relationship between current assets and current liabilities. [3]

The operating cycle is the period of time elapsing between the acquisition of goods and services involved in the manufacturing process and the final cash realization resulting from sales and subsequent collections. Industries that manufacture products requiring an aging process, and certain capital-intensive industries, have an operating cycle of considerably more than one year. On the other hand, most retail and service establishments have several operating cycles within a year.

See the FASB Codification References (pages 708–709).

Here are some typical current liabilities:

  1. Accounts payable.
  2. Notes payable.
  3. Dividends payable.
  4. Customer advances and deposits.
  5. Unearned revenues.
  6. Sales taxes payable.
  7. Income taxes payable.
  8. Employee-related liabilities.
  9. Current maturities of long-term debt.
  10. Short-term obligations expected to be refinanced.


Leave Comment

Your email address will not be published. Required fields are marked *