Long-Term Liabilities
Candlefocus EditorAssets purchased as part of long-term liabilities are recorded as a long-term asset, such as property, plant, and equipment (PP&E). Typically, long-term liabilities are those obligations that a business has backed with guaranties or other forms of security. Also, since these long-term liabilities are not typically due in a single payment, they must be documented and amortized according to the period that they are payable over.
Long-term liabilities are shown separately from current liabilities on the balance sheet. While some items may appear to be of similar nature, such as notes payable and accounts payable, the differences between the two usually lie in the duration of the agreement terms. Any agreement with a maturity period of more than one year will be categorized as a long-term liability.
To cover their long-term liabilities, a business will normally have to enter into long-term borrowing agreements with creditors such as banks, insurance companies, and pension funds. By taking out loans, businesses can pay for expenses up front and make payments over a designated period of time. They provide a reliable source of capital while allowing companies to use their own assets and resources to generate returns.
Though long-term liabilities are a necessary part of business operations and enable businesses to expand and access resources, they still require careful management. Long-term obligations are a long-term commitment and, if not managed properly, can become a burden. For this reason, it is important to seek the advice of a professional financial planner to ensure that proper decisions are made when it comes to long-term liabilities.