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Current Liabilities

On doing business, there are some amounts which always remain to be given to the person who supplies us the raw-materials we call them Trade Creditors.  The concept is when we purchase raw-material from suppliers, we don’t make immediate payment instead we demand few days of credit from them, say, 1 month; now the good point is after 1 month we clear their payment but purchase another lot of raw-materials; in this way some amount is always due to be paid to creditors at any point of time in a year. It’s like interest free loan taken from suppliers so it’s indirect gain for us.

Similarly, there are some other short term obligations which we have to pay after the end of an accounting year we call it as ‘short term provisions’ it include proposed dividend, current tax, employee benefits etc.

Apart from that, there are some long term loans which are maturing within 12 months of preparation of Balance Sheet of the current year, we put it in head as ‘Other Current Liabilities’.  

Sometimes, we take Short term Loans to finance our current assets. We call it as ‘short Term Borrowings’.

Here one thing should be noted that it’s not necessary to have all the items in current liabilities there can have only one item or two or all.

If you have any question, please ask in the comment box below.

Current Asset

These are the assets we required to perform the day to day activities of the business. We need to purchase raw-material, apply them in work in progress, and make it finished products to sell it to the debtors. Some raw materials are always lying in our Godown, some raw-materials are always in the process of making- we call it as work-in-progress, some finished products are always in our Godown at any point of time in a year.  The aggregate of Raw-material, work-in-progress, and Finished Goods are called Inventories. Apart from inventory, there are also some amount of money that always remains blocked on the parties to whom we sold our finished goods, we call them as Debtors/Trade Receivables. It is like interest free loan given to customers so it’s our indirect loss to have more amounts in debtors. Some amount of cash and treasury bills, marketable securities are always there in our Bank or with us, we call it as Cash and Cash Equivalents.

Apart from that we sometimes, give short loans to other companies or give advances to our suppliers we put these amounts in the category of Loans and Advances.

And the interest on the above loans and advances are kept under the head ‘other Current Assets’

The aggregates of Inventories, Trade Receivables; Cash and cash equivalents, loans and advances; and Other Current Assets are called Current Assets. These are the assets that can be converted into cash within 12 months.

One thing should be noted that it is not necessary to have all the items in current assets sometimes it may have one items or two or all.

If you have any question regarding this concept, please ask in the comment box below.