Texas Real Estate Brokerage Sales Apprentice Education (SAE) Practice Exam

How long must liabilities be settled to be considered current liabilities?

1. 6 months

2. 12 months

3. 18 months

4. 24 months

The correct answer is: 12 months

In financial accounting, liabilities are classified as current if they are expected to be settled within a specific time frame. The standard time frame for defining current liabilities is one year, which translates to 12 months. This classification allows businesses to present a clear picture of their short-term financial obligations. Therefore, any liability that is due to be settled within 12 months from the balance sheet date is recognized as a current liability. This includes accounts payable, short-term debts, and any other obligations the company anticipates will need to be paid within the next year. This classification is crucial for investors and creditors, as it helps assess the liquidity and short-term financial health of an entity. In contrast, liabilities that extend beyond this one-year period typically fall under long-term liabilities, which includes obligations like bonds payable or long-term loans. This differentiation between current and long-term liabilities is essential for business management, financial reporting, and analysis.