Current liabilities is a section of the Liabilities and Equity side of the balance sheet. It refers to accounts payable, credit card debts, short term debts, and payroll compliance or taxes owed.
It is more common in small business, especially small contractors, to buy materials using credit cards. Often the credit card accounts are the owner’s personal accounts. Sometimes the cards are merchant cards. As the bookkeeper it is your job to keep this information organized and up to date.
In business purchases describes the process of acquiring the necessary goods and materials for operations. Many novice business individuals believe the term is strictly limited to those materials purchased for resale. In reality it is much broader in scope and encompasses all forms of expenses too. When a company buys insurance, it is making a purchase.
Many businesses especially retail have to collect sales tax as a function of their legal mandate from state governments. In effect the business is a collection agent for the state. If properly set up, this collection process is automated using modern retail accounting software.
The college textbook definition of working capital is current assets minus payables and accrued expenses. The term explains the dollar value of flexibility a business operation has to take advantage of immediate opportunities or endure sudden or long-term setbacks. Since it is a balance sheet based formula the value is a function of a moment in time.
This article will illustrate the opposite effect using the same business information. A buyer of a business should be leery of financial information and look for improper accounting processes. The goal is to reduce the operational income and ultimately the value of the business. The goal is to get the business valuation to a realistic number.
The balance sheet serves as an historical report. It identifies the accumulated change in value since inception. The balance sheet is organized into two halves and both sides must be equal in value. In addition, the balance sheet is a snapshot of the financial condition at a single moment in time along the lifetime timeline of the company.
The accounts payable turnover rate is a business activity ratio measuring the frequency of the company’s ability to pay its vendors and suppliers. The numerical value is customarily reported as an annual value. The higher the number, the more often the payables are cleared (paid). A ’12’ would indicate that all payables are paid every month (360 days/12 = 30 days). Ideal values exceed 20 as this indicates all accounts are paid on average at least every 18 days (360 days/20 = 18 days).
Working capital management is a function of finance whereby management ensures adequate cash is available to meet operational needs over the typical working capital cycle. The underlying elements of working capital management include 1) understanding the different forms of current assets and current liabilities and their corresponding cash cycles; 2) recognizing the relationships of production and sales flow; and 3) planning the inflows and uses (outflows) of cash.
Cash is the lifeblood of every business. Without cash a business operation can come to a standstill. Cash is one component of working capital, a term referring to current assets (Gross Working Capital) less payables and accrued expenses.
To truly be successful in business you will need others. For most businesses this refers to employees and suppliers. Whenever a business commits to purchase time or product and that employee delivers their time or the supplier delivers the product, you owe them money. This is a liability.
