Small Business Accountants

What are Current Liabilities?

Current liabilities, also called short-term liabilities, are financial obligations your business must settle within 12 months of the balance sheet date. They include trade creditors, bank overdrafts, short-term loans, accrued expenses, and tax liabilities such as VAT, PAYE and Corporation Tax. Monitoring them helps you assess liquidity, manage working capital and keep your business financially healthy.

By Jordan Macey MAAT Reviewed by Noor Fiaz Updated 16 Apr 2026 1

What Are Current Liabilities? - Current Liability Definition - GoForma Small Business | UK Accountants & Tax Advisors

Key takeaways

Current liabilities are obligations due within 12 months of the balance sheet date, including trade payables, overdrafts, short-term loans, accrued expenses, and tax liabilities such as VAT, PAYE and Corporation Tax.
They appear in a dedicated current liabilities section on the balance sheet, separate from long-term liabilities, following the presentation requirements set out in FRS 102 Section 4.
The current ratio divides current assets by current liabilities and measures short-term liquidity. A ratio below 1 means the business cannot cover its immediate debts from current assets alone.
Working capital is calculated as current assets minus current liabilities. Positive working capital means the business can meet its short-term obligations; negative working capital signals a liquidity risk.
Keeping current liabilities under control is essential for cash flow planning. Unpaid VAT, PAYE or Corporation Tax can quickly escalate into HMRC penalties and interest if not settled on time.

https://www.goforma.com/small-business-accounting/31-accounting-terms-concepts-you-need-to-know" target="_blank">Current liabilities, otherwise known as short-term liabilities are due within a year.

Frequently asked questions

What are current liabilities on a balance sheet?

Current liabilities are financial obligations a business expects to settle within 12 months of the balance sheet date. They typically include trade creditors (amounts owed to suppliers), bank overdrafts, short-term borrowings, accrued expenses such as salaries not yet paid, tax liabilities including VAT, PAYE and Corporation Tax, and dividends declared but not yet distributed. They sit in their own section of the balance sheet, separate from long-term liabilities due after 12 months.

What is the difference between current liabilities and long-term liabilities?

The distinction is timing. Current liabilities fall due within 12 months of the balance sheet date, while long-term liabilities are obligations payable after that 12-month window, such as bank loans with more than a year to run or finance lease obligations extending beyond the current period. If a long-term loan has an instalment due within 12 months, that portion is reclassified as a current liability on the balance sheet so readers can see the near-term cash requirement clearly.

What is the current ratio and what does it tell you?

The current ratio is calculated by dividing current assets by current liabilities. A ratio of 1.0 means current assets exactly match current liabilities. A ratio above 1.0 suggests the business can comfortably meet its short-term obligations, while a ratio below 1.0 indicates the business may struggle to pay debts due within the year without additional financing. Lenders and investors use the current ratio alongside other metrics to assess the liquidity and short-term financial health of a business.

What is working capital and how does it relate to current liabilities?

Working capital is the difference between current assets and current liabilities. Positive working capital means a business has more short-term assets than near-term debts, giving it a buffer to operate and grow. Negative working capital means liabilities exceed assets in the short term, which can signal cash flow problems. Managing current liabilities carefully by paying suppliers on agreed terms, settling tax on time and controlling overdraft use directly supports a healthy working capital position.

Are VAT, PAYE and Corporation Tax treated as current liabilities?

Yes. VAT collected from customers that has not yet been remitted to HMRC, PAYE and National Insurance deducted from employee salaries and due to HMRC, and Corporation Tax accrued on the current year's profits are all current liabilities. They represent amounts owed to HMRC that must be paid within 12 months. Failing to settle them by their due dates results in HMRC interest and penalty charges, which can compound quickly for small businesses.

Which accounting standard governs how current liabilities are presented?

For most UK small businesses, FRS 102 Section 4 governs the presentation of the balance sheet, including the classification and disclosure of current liabilities. It requires businesses to separate current and non-current liabilities clearly and to disclose amounts due to creditors within one year and after more than one year. Micro-entities applying FRS 105 follow a simplified balance sheet format but must still distinguish between creditors due within one year and those due after.

Can a bank overdraft be a current liability?

Yes. A bank overdraft is almost always classified as a current liability because it is repayable on demand or within 12 months. Even if a business has relied on an overdraft facility for several years, it must still appear under current liabilities on the balance sheet unless there is a formal agreement that the bank cannot demand repayment within 12 months. Overdrafts should be monitored closely because interest charges and facility fees can increase the total amount owed quickly.

Need help with this for your business?

Book a free 20-minute call with one of our MAAT or ACCA qualified accountants. We will tell you honestly whether we can help.

203 5-star reviews

ACCA & AAT qualified

Set up in 24 hours