What are current liabilities?

Current liabilities are obligations a business must settle within one year or one operating cycle. They include accounts payable, accrued expenses, short-term debt, the current portion of long-term debt, deferred revenue, and payroll liabilities. Current liabilities appear on the balance sheet and represent near-term cash demands on the business.

Common current liabilities for service firms

Accounts payable covers vendor bills that have not yet been paid. Accrued expenses include wages earned but not yet paid and utilities consumed but not yet billed. Deferred revenue represents retainers or prepayments where work has not been delivered. Payroll liabilities include withheld taxes awaiting remittance. Credit card balances due within 30 days also qualify.

Managing the current ratio

The current ratio is current assets divided by current liabilities. A ratio of 1.5 to 2.0 is generally healthy for service firms. A value below 1.0 indicates that current obligations exceed current resources, signaling liquidity risk. A level that's too high suggests inefficient capital use. Monitor monthly to catch trends before they become problems.