A liability is a responsibility or a promise to another person or entity. To resolve financial issues, many companies use internal and third-party funding sources. In the second case, the organization will have so-called long-term and short-term obligations. A long-term liability is a promise that you are going to fulfill later. Besides getting loans, there are many other types of long-term liabilities.
- Notes payable. Notes payable represents a loan from a bank or any other financial institution against security or a personal guarantee and requires a formal loan agreement. There are portions of those notes payable that if they come due in the next year, they become the current portion of the long-term liability in the accounting records. In other words, you can have both a current portion of the loan payments and a long-term portion, which are the payments you are going to make in more than a year from now.
- Bonds. Bonds payable means that a corporation comes up with these legal instruments that they sell to raise money to finance new expansions and for various other reasons. Bonds make it easy for a company to find investors who are willing to loan smaller amounts.
- Deferred income tax liabilities. This item is intended for income tax liabilities, the settlement period for which falls on the following reporting periods. It is often put under long-term liabilities in the Balance sheet since there is usually no expectation of paying it within the next 12 months.
- Leases. There are two types of leases and one of them is a long-term lease. It is commonly referred to as a capital lease. It means that a company is signing a contract that it promises to take care of and use that piece of property, whether it is a building, equipment, or vehicle, for a period of longer than a year. The company basically has similar rights as the owner, although it will have to give back the assets at the end of the lease agreement.
- Mortgages. The business can also buy assets without paying the whole sum right away. In this case, it will get a mortgage. A mortgage is a long-term commitment to pay back the money that it borrowed in order to buy that property or building.
- Pensions. Pension obligations are pension benefits earned by employees. This is an important financial liability to keep an eye on because it can make an otherwise healthy company appear as if it is in large debt.
- Long-term deferred income. This item accounts for liabilities related to received prepayments, the repayment of which is planned for the next reporting periods. For example, income from renting an office space is paid three years in advance. It also reflects resources received from buyers and customers for the supply of goods and services, the due date of which is due in the next reporting periods.
- Other long-term liabilities. They include liabilities of the company with a maturity of more than one accounting period, which were not included in any of the previous sections of liabilities.
A fisherman buys a boat for fishing for $20,800. The fisherman has his own capital of $8,800. The bank issues a three-year loan of $12,000. The boat was bought and the fisherman started to work. He has to repay $4,000 per year plus interest on the loan, with the first payment being due this year. Each year, the amount paid during the current year is reflected in the current liabilities section. Every year $4,000 is transferred from Long-term Liabilities to Short-term Liabilities until the whole debt is repaid.
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Author: Charles Lutwidge