Current Liabilities


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Current Liabilities: The term ‘Current Liabilities’ is used principally to designate such obligations whose liquidation is reasonably expected to require the use of assets classified as current assets in the same balance sheet or the creation of other current liabilities or those expected to be satisfied within a relatively short period of time usually one year. However, this concept of current liabilities has now undergone a change. The more modern version designates current liabilities as all obligations that will require within the coming year or the operation cycle, whichever is longer. The use of existing current assets or the creation of other current liabilities . in other words, the more fact that an amount is due within a year does not make it current liability unless it is payable out of existing current assets or by creation of current liabilities. For example debentures due for redemption within a year of the balance sheet date will not be taken as a current liability if they are to be paid out of the proceeds of a fresh issue of shares / debentures or out of the proceeds realized on account of sale of debentures redemption fund investments.

 

The term current liabilities also includes amounts set apart or provided for any known liability of which the amount cannot be determined with substantial accuracy e.g., provision for taxation, pension etc., These liabilities are technically called provisions rather than liabilities.

 

The broad categories of current liabilities are:

 

  1. Accounts payable e.g., bill payable and trade creditors.
  2. Outstanding expenses, i.e., expenses for which services have been received by the business but for which the payment has not made.
  3. Bank-over drafts.
  4. Short-term loans, i.e., loans from banks, etc., which are payable within one year from the date of balance sheet.
  5. Advance payments received by the business for the services to be rendered or goods to be supplied in future.
  6. Current maturities of long-term loans, i.e., long-term debts due within a year of the balance sheet date or installments due within a year in respect of these loans, provided payable out of existing current assets or by creation of current liabilities, as discussed earlier. However, installments of long-term loans due after a year should be taken as non-current liabilities.

 

Meaning of “Flow of Funds” The term “Flow” means change and therefore, the term “Flow of Funds” means “Change in Funds” or “Change in working capital”. In other words, any increase or decrease in working capital means “Flow of Funds”.


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