Correlation Between Accounting and Current Liabilities of Manufacturing Companies of India

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A current liability is an obligation that is 1) due within one year of the date of a company's balance sheet and 2) will require the use of a current asset or will create another current liability. If a company's operating cycle is longer than one year, current liabilities are those obligations due within the operating cycle. Current liabilities are usually presented in the following order: 1. the principal portion of notes payable that will become due within one year 2. accounts payable 3. the remaining current liabilities such as payroll taxes payable, income taxes payable, interest payable and other accrued expenses A liability is an obligation of a company to pay in future for the present benefits or the acquisition of assets. Short term liabilities are those liabilities which become due within one year. Some of the common short term liabilities are: creditors, short term loans, outstanding expenses, and lease liabilities, tax payable and unearned incomes (income received but not due). Short term liabilities are generally called current liabilities. Table shows financing by current liabilities of some of the well-known companies of India: Table: Current Liabilities as % of Total Liabilities (Rs. Crore) as on 31 Mar 06 Creditors: When revenue goods are purchased on credit it results in a short term liability. Creditors are the money payable to the suppliers of revenue goods. Table shows that quite a large percentage of total current liabilities of some of the well-known companies are in the form of sundry creditors.

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Table: Sundry Creditors (Rs. In Crore) as on 31 March 2006 The cluster of liabilities comprising current liabilities is closely watched, for a business must have sufficient liquidity to ensure that these liabilities can be paid off when due. Since current liabilities are typically paid by liquidating current assets, the presence of a large amount of current liabilities calls attention to the size and prospective liquidity of the offsetting amount of current assets listed on a company's balance sheet. Current liabilities may also be settled through their replacement with other liabilities, such as with short-term debt.

Chakraborty (2008) evaluated the relationship between working capital and profitability of Indian pharmaceutical companies. He pointed out that there were two distinct schools of thought on this issue: according to one school of thought, working capital is not a factor of improving profitability and there may be a negative relationship between them, while according to the other school of thought, investment in working capital plays a vital role to improve corporate profitability, and unless there is a minimum level of investment of working capital, output and sales cannot be maintained - in fact, the inadequacy of working capital would keep fixed asset inoperative. Garcia-Teruel and Martinez-Solano (2007) studied the effects of working capital management on the profitability of a sample of small and medium-sized Spanish firms. They found that managers can create value by reducing their inventories and the number of days for which their accounts are outstanding. Singh and Pandey (2008) suggested that, for the successful working of any business organization, fixed and current assets play a vital role, and that the management of working capital is essential as it has a direct impact on profitability and liquidity. They studied the working capital components and found a significant impact of working capital management on profitability for Hindalco Industries Limited. The conclusive sum of this retrospective review of relevant literature produced till date on the offered subject reveals wide room for the validity and originates of this work and reflects some decisive evidences that affirm its viability, as may be marked here it. Nor has any previous research examined the liquidity position and the existence of liquidity and profitability relationship of private sector steel companies in India. The aggregate amount of current liabilities is a key component of several measures of the short-term liquidity of a business, including:  Current ratio. This is current assets divided by current liabilities.  Quick ratio. This is current assets minus inventory, divided by current liabilities.  Cash ratio. This is cash and cash equivalents, divided by current liabilities. For all three ratios, a higher ratio denotes a larger amount of liquidity, and therefore an enhanced ability for a business to meet its short-term obligations.

The following is a list of current and non- current liabilities:

In this article we found that a liability is a compulsion of a company to pay in future for the present benefits or the acquisition of assets. Short term liabilities are those liabilities which become due within one year. Accounts payable and accrued expenses are comes under the category of Current Liabilities while Bank Loan is an example of non-current Liabilities.

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• Chakraborty, K. (2008), “Working Capital and Profitability: An Empirical Analysis of Their Relationship with Reference to Selected Companies in the Indian Pharmaceutical Industry,” The ICFAI Journal of Management Research

• Garcia-Teruel, P.J. and Martinez-Solano, P. (2007). Effects of working capital management on SME profitability, International Journal of Managerial Finance, Vol.3, Issue 2. Journal of Management Research ISSN 1941-899X 2011, Vol. 3, No. 2: E8 www.macrothink.org/jmr 22

• Singh, J.P. and Pandey, S. (2008). Impact of Working Capital Management in the Profitability of Hindalco Industries Limited, the ICFAI University Journal of Financial Economics, Vol. 36.

• Ms. Ankita Rajdev , “working capital management of makson healthcare pvt ltd: a trade -off between liquidity and profitability, an empirical study” ResearchersWorld -Journal of Arts, Science & Commerce , E-ISSN 2229-4686 , ISSN 2231-4172

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