Question

How are current liabilities related by definition to current assets? How are current liabilities related to a company’s operating cycle?

Short answer

Current liabilities are usually settled with the help of current assets that are used within one year. Clearance of current liabilities usually takes place within the company’s operating cycle.

Step-by-step solution

Definition of Current Liabilities

Current liabilitiesare liabilities payable in an accounting year. These liabilities are created either out of realization from current assets or by the formation of new current liability.

Relationship between current liabilities and current assets

The company’s current assetsand assets are correlated, and understanding them is important for ascertaining the company’s financial position. It is due to the reason that comparing both the accounts will let us know whether the company is capable of paying the debts for that accounting year or not.

Current liabilities are obligations whose liquidation is done by using existing resources, grouped as current assets, or by creating other current liabilities.

Relationship between current liabilities and company’s operating cycle

An operating cycle is the time required by the company for buying inventory and converting it to cash from its sale.

Since current liabilities are by definition related to currents and, similarly, current assets with the operating cycle, one can say that liabilities are also related to the operating cycle.