What are Long-Term Liabilities?

//What are Long-Term Liabilities?
What are Long-Term Liabilities? 2017-10-05T06:41:27+00:00

Definition: A long-term liability, often called a non-current liability, is an obligation that will not be paid off in the current year or accounting period. In other words, its debt that is not due within a year. Some common examples of long-term liabilities are notes payablebonds payable, mortgages, and leases.

What Does Long Term Liabilities Mean?

Current liabilities, debt that will be paid back within the next year, and long term liabilities are usually stated separately on the balance sheet. Current debts are always listed first in the liabilities section. Long-term liabilities can also be broken into two pieces: the amount due in the next year and the amount not due within a year.

This helps investors and creditors see how the company is financed. Current obligations are much more risky than non-current debts because they will need to be paid sooner. The business must have enough cash flows to pay for these current debts as they become due. Non-current liabilities, on the other hand, don’t have to be paid off immediately.

Investors and creditors often use liquidity ratios to analyze how leveraged a company is. Ratios like current ratio, working capital, and acid test ratio compare debt levels to asset or earnings numbers.

Example

Businesses try to finance current assets with current debt and non-current assets with non-current debt. Let’s take a retailer for example. Bill’s retailer store sells clothing and apparel. Bill wants to expand his storefront but doesn’t have enough funds. Bill talks with a bank and gets a loan to add an addition onto his building. Later in the season, Bill needs extra funding to purchase the next season’s inventory. Bill goes back to the bank to get an loan for inventory.

Since the building is a long term asset, Bill’s building expansion loan should also be a long-term loan. Typical building loans can range from 5 year to 30 years. The inventory, on the other hand, is a current asset. Thus, this loan should be a one year note.