A liability is an obligation to convey assets or do services at some future date. For purposes of balance sheet analysis, it is important to create a distinction between short-term or current liabilities and long-term liabilities.
The Nature of Current Liabilities
Current liabilities include those obligations which will need payment from existing current assets and all other obligations that are to be paid from present assets within one year. Usually, current liabilities arise from day-to-day business operations (i.e., Salaries Payable, Accounts Payable etc.). Others can result from the need for short-term loans (i.e., Notes Payable) and still others from management-created long-term obligations having a exact relationship to a short-term period (i.e., current maturity values of long-term loans).
Proper recognition and correct measurement of all current liabilities are essential in order to avoid overstatement of assets, long-term liabilities or net income (i.e., the entire balance sheet equity section). Further, current and long-term liabilities have to be accurately distinguished so that net working capital will be properly stated. Lastly, the preparation of meaningful cash budgets needs that a complete record of all current liabilities be kept.