Many businesses operate using debt as a tool. Not all debt is the same. There are debts that are paid off relatively quickly, and other debts that are paid off over an extended period of time. Knowing how to classify a company's debts is important when assembling the financial balance sheets for the company.
Current liabilities are considered short term debt for a company. Current liabilities are amounts that can be paid off within one year.
Long term liabilities are items that a company intends to keep on their financial balance sheet for longer than a one year period of time.
Long term liabilities do not require interest payments during the current year. Some of these include leases, deferred expenses and employee benefits that are payable in the future.
Wages, expenses such as electricity and water, payroll taxes and short term leases are all considered short term liabilities on their balance sheets.
The current ratio used in accounting is computed by dividing the current assets of a company by its current liabilites, also known as its short term liabilities.
