Read Along With the VideoTranscript
Let's talk quickly about current liabilities. And this is gonna be quick because if you've seen the current assets video, you should know pretty much everything about current liabilities. So current assets and current liabilities only differ in the fact that, well, one is assets and one is liabilities. Pretty straightforward. So if you go watch the current assets video... I'll do a brief overview here of what current means in accounting. Current means less than one year most of the time. Most of the time it means less than one year. So if you remember nothing else, remember current is less than a year. What it really means is the maximum of your operating cycle or one year.
So if your operating cycle is two years long, then current for your business means less than two years. But that's not the case most of the time. Most of the time it's less than one year. But you do need to know technically that current is the maximum of your operating cycle or one year. Most of the time your operating cycle is something like, let's say, 45 days. So what's bigger between 45 days and a year? Well, one year, obviously. So what are some current liabilities? One of the only tricky ones that you're gonna see is note payable. And the reason that note payable can be kind of tricky is because it could be a current liability or a non-current liability.
It could fall into either. So this one could go in either bucket and all of that depends on the maturity date. And the maturity date is just a fancy way for saying when is the loan due. These two are the same thing. So when you see note payable on the quiz or the test, whatever the question is, when you see note payable you need to figure out what's the maturity date of the note.
If the maturity date is less than one year, so if in less than a year you have to pay the loan back, well, you guessed it, current liability. If the maturity date is more than a year, exactly, non-current liability. It's not super difficult, but the thing you gotta look out for is that you're making sure you're paying attention to when does the note mature. You can't just put it in current or non-current without figuring out when it's actually due.
Some of the other common ones that you'll see, you'll see something, something, something payable. Whenever you see payable, that's a pretty good indication that it's a short term. So you're gonna see stuff like wages payable, accounts payable, let's say insurance payable, taxes payable, maybe even rent payable, that kind of thing. All of these payables are basically things you need to run your business. So whenever you see any of these payables and it's an operations item, something you're actually using to run your business, these are all gonna be current liabilities. And just like the rest of accounting, you can think about it and figure out most of it.
So what are wages? Well, wages are what you pay your employees. If you owe your employees, you should probably pay them in less than a year, right? So you can work your way down all of these. If you owe rent, you have to pay it in less than a year. So all of these are gonna be current. There's one more that's not a payable, and that is unearned revenue. And we'll have a whole video about unearned revenue and what it is and how to calculate it and all that good stuff. But for now, let's just briefly go over why it's a liability and whether it's current or non-current.
So unearned revenue obviously leads you to believe that you have not earned whatever revenue it is, right? Pretty straightforward. So because it's unearned, that means at some point you're gonna have to earn it. So what unearned revenue is, is you got money and then later you provide the good or service.
And think about how you transact with businesses. Most of the time you give them money and at the same time you get the good or service, right? So if you go to the store, you hand over money, they give you the good. But sometimes you pay ahead of time and then later you get the good or they provide the service. So in this whole period when the company has received money but hasn't actually done any work, that's called an unearned revenue. And so if you go back and watch the video about liabilities, we decided that a liability was a probable future economic sacrifice. So an unearned revenue fits this definition pretty well.
In the future we're going to have to sacrifice either a good or a service, and that's gonna be an economic sacrifice to us, 'cause either one of these things is gonna cost us money as the company. So that means unearned revenue is a liability because at some point we have to earn it and that's a liability. Now the question is, is it short term or long term? Is it current or is it non-current? And usually this one is going to be a current liability because if someone pays you ahead of time, they have a reasonable expectation that you're going to perform the service or provide the good in a timely manner, much less than one year.