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Liabilities

  1. Accrued Liability
  2. Long-Term Debt
  3. Unearned Income
  4. Long Term Liabilities
  5. Total Liabilities
  6. Capitalized Lease
  7. Deferred Tax Liability
  8. Short-Term Debt

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Long Term Liabilities: Definition & Examples

Updated: November 24, 2022

Companies will have a number of financial obligations and business owners will know how important it is to keep a track of these obligations. 

There are several different types of liabilities that will last varying times. 

Long-term liabilities are a common type that are mainly associated with business loans. 

Read on as we take a closer look at everything to do with these types of liabilities, such as how you calculate them, how they’re used, and give you some examples.

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    KEY TAKEAWAYS

    • Long-term liabilities are financial obligations that aren’t due until more than one year later.
    • Long-term debt’s current portion is listed separately. This provides a better picture of current liquidity.
    • It also shows whether the company can pay current liabilities when they’re due.
    • Long-term liability is sometimes referred to as non-current liability or long-term debt.

    What Are Long-Term Liabilities?

    Long-term liabilities refer to a company’s financial obligations. These are debts due several years down the road. On a balance sheet, a current portion of any long-term debt gets listed separately. This provides a better picture of a company’s current liquidity.

    It also shows whether the company can pay its current liabilities when they’re due. Long-term liability is sometimes referred to as non-current liability or long-term debt.

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    How Do You Calculate Long-Term Liabilities?

    To calculate long-term liabilities, you will need to review a company’s balance sheet. Long-term liabilities are often listed under the heading “long-term debt” or “non-current liabilities.” Long-term debt’s current portion is usually listed separately. For example:

    Company A has the following long-term liabilities on its balance sheet:

    Bonds Payable: $1,000

    Leases Payable: $500

    Loans Payable: $2,000

    Notes Payable: $1,000

    Long-term debt’s current portion is the portion of these obligations that is due within the next year. In this example, long-term debt’s current portion would be $1,000. This amount is often listed separately on balance sheets. This ensures a more accurate view of the company’s current liquidity and its ability to pay current liabilities as they come due.

    Keep in mind that long-term liabilities aren’t included with tax liabilities. This ensures a better picture of your debt ratios. 

    Examples of Long-Term Liabilities

    Some examples of long-term liabilities include:

    • Bank loans
    • Mortgage payments
    • Lease payments
    • Bond payable

    Long-term debt’s current portion is usually due within the next 12 months. It is usually paid with cash from operations or short-term borrowing. 

    Long-term debt’s current portion is a more accurate measure of a company’s liquid assets. This is because it provides a better indication of the near-term cash obligations.

    Non-current liabilities, on the other hand, are not due within the next 12 months and are typically paid with long-term financing or equity. Equity is the portion of ownership that shareholders have in a company. 

    Long-term financing is usually in the form of bonds. These are debt instruments that require periodic interest payments. In addition, you owe principal repayments over the life of the bond.

    While long-term liabilities provide financing for a company, they also create risk. The most common risks associated with long-term liabilities are interest rate risk and credit risk. 

    Interest rate risk is the risk that changes in interest rates will impact the payments required on the debt. Credit risk is the risk that the borrower will not be able to make the required payments.

    Long-term and short-term liabilities have their own pros and cons. Short-term liabilities carry fewer risks. 

    Thus, the lessened debt burden is preferred in many instances. This is because there are fewer commitments through debt service providers. 

    Both of these risks are manageable through hedging strategies. Hedging is a way to protect against potential losses by taking offsetting positions in different markets. For example, a company can hedge against interest rate risk by entering into an agreement. Here, you swap variable-rate debt for fixed-rate debt. 

    This strategy can protect the company if interest rates rise because the payments on fixed-rate debt will not increase.

    Hedging can protect against credit risk. For example, a company can buy credit default swaps, which are insurance contracts that pay out if the borrower defaults on their debt. This type of hedging strategy can protect the company if the borrower is unable to make their required payments.

    Long-term liabilities are an important part of a company’s financial statement. They provide financing for operations and growth, but they also create risk. Hedging strategies can manage this risk and protect against potential losses.

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    How Long-Term Liabilities Are Used

    Long-term liability can help finance a company’s long-term investment. For example, the expansion of a company’s operations. This could be through the purchase of new equipment or property. 

    They can also help finance research and development projects or to fund working capital needs. You usually repay long-term liabilities over a period of several years. You need to do this through regular payments, called debt service.

    This financing structure allows a quick infusion of cash. You then repay this debt in respect to your debt agreement. For many businesses, this debt structure allows for financial leverage to complete goals. 

    Moreover, you can save a portion of business earnings to go toward repaying debt. Or you can use it for future investments. This form of debt can give you the boost you need to stay afloat or grow your business.

    It’s important to note that there are several types of long-term liabilities. These include note, lease, loan, and bond payable. Bonds get issued by a company in order to raise capital and are typically repaid over a period of years.

    Leases are agreements between a lessee and a lessor. Here, the lessee agrees to make a periodic lease payment to the lessor. This is in exchange for the use of an asset, such as equipment.

    Loans are agreements between a borrower and lender in which the borrower agrees to repay the loan over a period of time, usually with interest.

    Notes payable are similar to loans but typically have a shorter repayment period and may not include interest.

    Long-term debt’s current portion is the amount of long-term debt that is due within the next year.

    Summary

    Long-term liabilities are obligations that are not due for payment for at least one year. These debts are usually in the form of bonds and loans from financial institutions.

    A company may choose to finance its operations with long-term debt if it believes that it will be able to generate enough cash flow to make the required payments. However, this type of financing is often more expensive than other forms of debt, such as short-term loans.

    As a result, companies must carefully consider whether they can afford the higher interest payments associated with long-term debt before taking on this type of obligation.

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    FAQs About Long Term Liabilities

    What are 3 types of long-term liabilities?

    Long-term loans, bonds payable, and pension liabilities.

    What accounts are part of long-term liabilities?

    These accounts include debentures, loans, bonds payable, and deferred income tax.

    What is the difference between current and long-term liabilities?

    You have to repay current liabilities within one year. You repay long-term liabilities over several years, such as 15 years.

    What is a current portion of long-term debt?

    This is the amount of long-term debt that is due within the next year. This section is usually listed separately on a company’s balance sheet. This ensures a clearer view of the company’s current liquidity and its ability to pay current liabilities as they come due.

    What is the purpose of long-term liabilities?

    Long-term liabilities can help finance the expansion of a company’s operations or buy new equipment or property. They can also finance research and development projects or fund working capital needs.

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