What Are Long-Term Liabilities? Definition & Examples

Businesses incur obligations to fund their operations and growth. These financial obligations, amounts owed to external parties, are known as liabilities. They appear on a company’s balance sheet, providing a snapshot of what the company owes at a specific point in time. Liabilities are settled over time through the transfer of economic benefits, such as money, goods, or services.

Understanding Long-Term Liabilities

Long-term liabilities represent financial obligations that a company expects to settle over an extended period, typically longer than one year from the balance sheet date. These obligations are also referred to as non-current liabilities. They play a significant role in a company’s capital structure, influencing its financial risk and overall financial health.

Companies incur long-term liabilities to finance major investments, such as acquiring property, plant, and equipment, or funding expansion initiatives. This financing aligns with the long-term nature of these assets, spreading repayment over multiple accounting periods. The composition and terms of a company’s long-term liabilities offer insights into its financial strategy and capacity for sustained operations.

Common Types of Long-Term Liabilities

Long-term liabilities appear on a company’s balance sheet, each serving a distinct purpose in a business’s financing activities. Common examples provide a clearer picture of a company’s long-term financial commitments.

Bonds payable are formal debt instruments issued by companies to raise substantial capital from investors. The issuing company promises to make regular interest payments over a specified period and to repay the original principal amount on a predetermined future date, often several years away. These instruments are a significant part of a company’s non-current liabilities.

Long-term notes payable represent loans obtained from banks or other financial institutions with repayment terms extending beyond one year. These formal written promises to pay involve larger borrowing amounts and are used to finance long-term assets or support ongoing operations. Unlike bonds, notes payable are usually bilateral agreements between the borrower and a specific lender.

Lease liabilities arise from long-term lease agreements, where a company has the right to use an asset for a period in exchange for regular payments. Accounting standards require companies to recognize these obligations on their balance sheets, reflecting the present value of future lease payments.

Deferred revenue, or unearned revenue, occurs when a company receives payment for goods or services it will deliver or perform more than a year in the future. This advance payment creates a liability because the company still owes the customer the product or service. As the goods or services are delivered over time, the deferred revenue is gradually recognized as actual income.

Deferred tax liabilities stem from temporary differences between a company’s accounting profit and its taxable profit. These liabilities represent future tax payments that will be due in a later period when these timing differences reverse. A common reason for such a difference is the use of different depreciation methods for financial reporting versus tax purposes.

Pension obligations represent a company’s future payment commitments to its employees’ retirement plans. This liability reflects the estimated present value of benefits earned by employees, which the company is obligated to pay upon their retirement. Actuaries determine this amount based on various assumptions, including future pay raises and employee mortality rates.

Distinguishing from Short-Term Liabilities

The primary distinction between long-term and short-term liabilities lies in their repayment timing. Long-term liabilities are obligations due beyond one year, while short-term, or current, liabilities are financial obligations settled within one year of the balance sheet date or the company’s operating cycle, whichever is longer. This timing difference impacts how these obligations are viewed in financial analysis.

Examples of short-term liabilities include accounts payable, which are amounts owed to suppliers for goods or services purchased on credit, typically due within 30 to 60 days. Other common short-term obligations are short-term notes payable, accrued expenses like salaries or utilities, and the portion of long-term debt that becomes due within the next 12 months. These obligations are usually paid using current assets.

This distinction is important for financial analysis, as it helps assess a company’s financial health. Short-term liabilities are relevant for evaluating a company’s liquidity, its ability to meet immediate financial obligations. Conversely, long-term liabilities provide insights into a company’s solvency, indicating its ability to meet financial obligations over an extended period and its overall financial stability.