Why It Matters: Current Liabilities

One of the key metrics that analysts, investors, and management watch is working capital, which is the difference between current assets and current liabilities.

For example, if you look at the annual report for The Home Depot, Inc. on page 33, you’ll find the balance sheet that shows $19.810 billion in current assets and $18.375 in current liabilities on February 2, 2020 (the end of the fiscal year). Therefore, working capital was $1.435 billion. That’s the difference between the most liquid assets and the bills that have to be paid soon, and it may seem like a lot of money, but from the statement of earnings on the next page, we see that operating expenses for the year were almost $2 billion per month.

You’ve already taken a good look at current assets, from cash and cash equivalents, inventory, accounts receivable, marketable securities, and other assets such as prepaid expenses. In this module, we’ll take a closer look at the common categories of current liabilities and you’ll explore how to recognize a current liability and how to record them.

Here is the current liability section from The Home Depot annual report:

THE HOME DEPOT INC.
CONSOLIDATED BALANCE SHEET
in millions, except per share data February 2, 2020 February 3, 2019
Subcategory, Current liabilities:
     Short term debt $     974 $     1,339
     Accounts payable 7,787 7,755
     Accured salaries and related expenses 1,494 1,506
       Total current liabilities Single line
18,375
Single line
16,716

 

The categories we’ll be examining in the following sections include accounts payable, sales tax payable, income taxes payable, deferred revenue and accrued expenses, and short-term debt, including the current portion of long-term debt.