Two Balance Sheets, One Business
We once looked at two versions of the same company's year end balance sheet. Same bank balance, same stock, same debts, same profit. One showed net current liabilities of £31,000. The other showed net current assets of £9,000. The only difference was a two page letter signed by the director a week before the year end.
That gap is what this guide is about. Current liabilities sound like a dull textbook heading, but the line between "current" and "non-current" decides your current ratio, your working capital, what a lender thinks of you and what a credit agency says about you. Small businesses rarely think about it until a bank asks why their accounts show more short term debt than short term assets.
What Are Current Liabilities?
Current liabilities are the amounts a business owes that are due to be paid within twelve months of the balance sheet date. They are sometimes called short term liabilities.
A liability is a present obligation, arising from something that has already happened, that the business expects to settle by paying out cash or another resource. You bought stock on credit, so you owe the supplier. You ran payroll, so you owe HMRC the tax you deducted. You borrowed money, so you owe the bank. The "current" label just tells the reader when the bill falls due.
On a UK company balance sheet prepared under the Companies Act formats, you will not usually see the words "current liabilities" at all. The statutory heading is "Creditors: amounts falling due within one year". It means the same thing. Long term debts appear further down as "Creditors: amounts falling due after more than one year", which is what everyone else calls non-current liabilities.
For where these sit in the bigger picture, our guide to the balance sheet walks through every heading in order.
The 12 Month Rule in Practice
FRS 102, the accounting standard most UK private companies follow, treats a liability as current if any of these apply:
- You expect to settle it within your normal operating cycle.
- It is due to be settled within twelve months of the reporting date.
- You do not have an unconditional right, at the reporting date, to put off settling it for at least twelve months.
The third test is the one that catches people out. It is not about when you plan to pay. It is about whether the creditor could make you pay sooner. A loan that the bank can call in tomorrow is current, even if you have every intention of paying it over five years and the bank has never once asked.
Two consequences follow from that:
- Anything repayable on demand is current. That includes overdrafts and most informal director's loans.
- The date that matters is the balance sheet date. An agreement signed after the year end does not move a liability out of current for the year just gone, even if it is signed before the accounts are finished.
Current Liabilities Examples
These are the current liabilities we see on almost every small company balance sheet we prepare in North London and Hertfordshire.
| Current liability | What it is | Typical timing |
|---|---|---|
| Trade creditors | Supplier invoices received and not yet paid. See trade payables | 30 to 60 days |
| VAT | VAT collected on sales less VAT reclaimed, owed for the latest quarter | One month and seven days after the quarter end |
| PAYE and National Insurance | Tax and NI deducted from wages plus employer's NI | 22nd of the following month if paid electronically |
| Pension contributions | Employee and employer workplace pension contributions | 22nd of the following month |
| Corporation tax | Tax on the year's profit | Nine months and one day after the year end for most small companies |
| Accruals | Costs incurred but not yet invoiced, such as the accountant's fee or the last month's electricity. See accruals and prepayments | Usually within a few months |
| Deferred income | Cash received for work not yet done, such as annual subscriptions. See deferred income | As the work is delivered |
| Bank overdraft | Any negative bank balance on a facility | Repayable on demand |
| Current portion of loans | The part of a bank loan, Bounce Back Loan or hire purchase agreement due in the next twelve months | Monthly instalments |
| Director's loan account (in credit) | Money the company owes its director | Usually repayable on demand |
| Dividends declared but unpaid | Final dividends approved by shareholders before the year end and not yet paid. See what is a dividend | Usually soon after declaration |
| Wages and holiday pay accrued | Net pay owed at the year end, and holiday earned but not taken if material | Next payroll run |
Notice how many of these are owed to HMRC. In a typical owner-managed company, VAT, PAYE and corporation tax together are often bigger than trade creditors. That is one reason we tell clients to treat the tax lines on their balance sheet as money that is already spent.
Non-Current Liabilities Examples
Non-current liabilities, also called long term liabilities, are amounts due after more than twelve months. Common examples are:
- The long term portion of bank loans. A five year loan of £60,000 repaid evenly shows £12,000 in current liabilities and the rest in non-current.
- Bounce Back Loans and CBILS loans still being repaid, split the same way.
- Hire purchase and lease liabilities beyond the next twelve months. Under the revised FRS 102, which applies to periods beginning on or after 1 January 2026, most leases now put a lease liability on the balance sheet, so many more small companies will see this line.
- Director's loans with a formal agreement that prevents repayment for more than a year.
- Deferred tax liabilities, usually arising because capital allowances have run ahead of depreciation. These are shown under provisions.
- Provisions for obligations of uncertain timing or amount, such as dilapidations on a lease that ends in four years. If you are unsure whether something is a provision or only a note, our guide to contingent liabilities covers the difference.
Current vs Non-Current Liabilities
| Current liabilities | Non-current liabilities | |
|---|---|---|
| Due | Within 12 months of the balance sheet date | After more than 12 months |
| UK format heading | Creditors: amounts falling due within one year | Creditors: amounts falling due after more than one year |
| Typical items | Trade creditors, VAT, PAYE, corporation tax, overdraft, accruals | Long term loans, lease liabilities, deferred tax, long term provisions |
| Used in | Current ratio, quick ratio, working capital | Gearing ratio, capital employed |
| Who watches it most | Suppliers and credit agencies | Banks and investors |
The same debt often appears in both columns. A loan is split every year, with the next twelve months' repayments moved into current and the remainder left in non-current. Your accounting software will not always do this for you. If your bookkeeper posts the whole loan to one nominal code, someone has to make the split at the year end, and in our experience it is one of the most frequently missed adjustments in DIY accounts.
How to Calculate Current Liabilities
There is no clever formula. You add up every amount owed that falls due within twelve months:
Current liabilities = trade creditors + tax owed + accruals + deferred income + overdraft + short term portion of loans + other short term creditors
If you only have totals to work with, you can get there from the accounting equation:
Current liabilities = total liabilities − non-current liabilities
or
Current liabilities = total assets − equity − non-current liabilities
The figure on its own tells you little. It earns its keep when you compare it with current assets. Current assets minus current liabilities gives net current assets (or net current liabilities if negative), which is the line UK accounts actually print. Current assets divided by current liabilities gives the current ratio.
Is a Bank Overdraft a Current Liability?
Yes. An overdraft is repayable on demand, so it is always a current liability, even if you have had the same facility for fifteen years and it renews automatically. This is the textbook answer and the practical one.
It also explains why a business living permanently in its overdraft can look weaker on paper than one with a five year term loan for the same amount. The overdraft sits entirely in current liabilities and drags down the current ratio. The term loan is mostly non-current. If your overdraft has become a fixture rather than a buffer, it is worth asking your bank whether part of it could be converted into a term loan. You will usually pay a lower rate as well.
Is a Director's Loan a Current Liability?
When the company owes the director money, it is a liability of the company. Whether it is current depends on the terms, and in most small companies there are no written terms at all. Without an agreement, the director can ask for the money back at any time, so the balance is repayable on demand and goes into current liabilities.
That is often the right answer. But it can make a solvent company look stretched, because the director's own money is being counted as if a hostile creditor could demand it next week. For the opposite situation, where the director owes the company, see our guide to the director's loan account and the s455 tax charge.
Worked Example: Larkspur Catering Ltd
Larkspur Catering Ltd is a fictional event caterer in Palmers Green with a 31 March year end. Here is its position at 31 March 2026.
Current assets: £96,000 (cash £38,000, debtors £44,000, stock £14,000)
| Current liabilities | £ |
|---|---|
| Trade creditors | 31,500 |
| VAT | 14,200 |
| PAYE and NI | 6,300 |
| Corporation tax | 18,900 |
| Accruals | 4,100 |
| Bank loan, next 12 months | 12,000 |
| Director's loan account | 40,000 |
| Total | 127,000 |
That gives net current liabilities of £31,000 and a current ratio of 0.76. Anyone pulling the accounts from Companies House, including a credit agency deciding how much credit suppliers should give Larkspur, sees a company that owes more in the next year than it can lay its hands on.
But the £40,000 director's loan is money the founder put in three years ago to buy kitchen equipment. She has no plans to take it out. If, before 31 March, she and the company sign a simple loan agreement saying the balance is not repayable before 1 April 2028, the company has an unconditional right to defer settlement for more than twelve months. The loan moves to non-current liabilities.
Now current liabilities are £87,000, net current assets are £9,000 and the current ratio is 1.10. Nothing about the business has changed. The cash, the debts and the risk are exactly the same. The accounts simply describe the real arrangement more accurately.
Two warnings. First, the agreement must exist at the balance sheet date. Signing it in June does not fix the March accounts. Second, it is a genuine restriction. If the director later needs that money for a house deposit, she has signed away the right to take it. We only recommend this when the money really is long term funding, and we usually suggest a clause allowing early repayment with the company's agreement.
Loan Covenants: The Trap That Works in Reverse
The same rule can push liabilities the other way. Many bank loans come with covenants, such as keeping debt below a multiple of profit or filing accounts on time. If you breach a covenant before the year end and the breach gives the bank the right to demand repayment, the whole loan can become a current liability unless the bank has formally waived the breach by the balance sheet date.
We have seen a single late set of management accounts turn £180,000 of term debt into "repayable within one year" on paper. If you know a covenant is at risk, talk to your bank before the year end, not after, and get any waiver in writing.
Why Current Liabilities Matter More Than They Look
Credit agencies read them. Small companies filing micro-entity accounts still show creditors due within one year on the public record. Net current liabilities is one of the first things a credit scoring model flags, and it affects the credit limits your suppliers set.
Lenders test them. A bank looking at a new facility will compare current assets with current liabilities and ask about anything unusual, especially large tax balances.
Directors are judged on them. If a company cannot pay its debts as they fall due, it is cash flow insolvent, and directors have a duty to consider creditors' interests. Current liabilities are the list of debts falling due.
HMRC is often the biggest creditor. VAT and PAYE are money you hold on HMRC's behalf. Using it to fund the business is the most common route into a Time to Pay arrangement, and it shows up first in current liabilities.
Our View
We think small business owners should look at current liabilities more often than they look at profit. Profit tells you whether the business is worth running. Current liabilities tell you whether it will still be running in six months.
Three habits make a real difference. Ring-fence the VAT and PAYE you collect in a separate account so they are never mistaken for spare cash. Put a written agreement in place for any director's loan you do not intend to withdraw, so your published accounts reflect reality. And make sure your year end accounts split every loan correctly between current and non-current, because lenders and credit agencies will assume the split is accurate.
How IAK Can Help
We prepare year end accounts for limited companies and small businesses across North London and Hertfordshire, and we check every liability classification before anything is filed at Companies House. Through our management reporting service we can track your net current assets month by month, so a bad trend shows up while there is still time to act. If your balance sheet shows net current liabilities and you are not sure why, get in touch.
Sources
- FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, Financial Reporting Council, Section 4 on statement of financial position and current liability classification.
- The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008, Schedule 1, legislation.gov.uk, for the balance sheet formats and creditor headings.
- Pay your Corporation Tax bill, GOV.UK, for the nine months and one day deadline.
- Pay employers' PAYE, GOV.UK, for PAYE payment deadlines.
- VAT returns: deadlines, GOV.UK, for VAT payment timing.
- If you cannot pay your tax bill on time, GOV.UK, on Time to Pay arrangements.