Understanding long-term liabilities

Definition

Long-term liabilities are amounts you owe that are not due within the next twelve months. On the books, they are a Balance Sheet grouping, not a single loan account and not this year's bills.

The group sits below current liabilities. Notes payable, a lease liability, and other borrowings that mature after a year all belong here.

Cash-basis books may still show a bank loan if the cash arrived. Accrual books also keep the remaining principal here until it comes due.

This section is the principal still owed later, not the interest cost. Interest hits the P&L as you use the money.

Where it shows up

Balance Sheet: Located below current liabilities and above equity.

P&L: Related to interest on the longer-term debt.

Cash flow: Increases in this section, reported cash from financing activities increases.

See also: Liabilities · Notes Payable · Current Portion Of Long-Term Debt

When you look at your Balance Sheet, this grouping sits below current liabilities and above equity. The section total is the sum of every amount owed that is due after the next year.

When the total is high, it usually means a building loan, equipment notes, or a long lease remain open. When the total is low, it usually means you have little long borrowing, or that most of the principal has already moved into the current group.

The profit and loss statement does not list this section as a line. Interest on the debt is the related charge each period.

On the Statement of Cash Flows, new longer-term borrowing is a financing inflow. This section rises, and reported cash from financing activities rises with it.

How it works

An amount gets into this grouping when you borrow, or sign a lease, with a due date more than a year out. The cash from a loan raises cash and raises this section.

You keep a debt schedule of each note: balance, rate, payment, and maturity. That worksheet is what proves the Balance Sheet total.

Each year, the principal due in the next twelve months leaves this grouping. That slice is the current portion of long-term debt, and it sits with the other current lines.

The rest of the principal stays here. Paying a regular installment drops cash, drops the current slice, and does not re-record the original loan.

A lease liability for a multi-year occupancy often sits here for the part due after this year. The current twelve months of that lease sit with current liabilities.

Interest is not this section. You record interest as it builds, and you pay it on the lender's schedule.

Loan agreements sometimes include a covenant, a condition you must keep meeting. Missing one does not by itself move the balance; it can put the remaining principal at risk of being called early.

When the loan is paid off, this grouping should sit at zero for that note. An old balance that still appears usually means a payment was posted to the wrong account.

Example

A pizza shop borrows $60,000 from the bank to buy a new oven, due over five years. The cash lands in the bank the same day.

The shop records:

Debit: Cash $60,000

Credit: Notes payable $60,000

Cash goes up by $60,000, and notes payable go up by $60,000. The Income Statement has not taken a $60,000 expense.

At year-end, $12,000 of principal is due within twelve months. The shop reclassifies that slice:

Debit: Notes payable $12,000

Credit: Current portion of long-term debt $12,000

This grouping falls by $12,000, and the current line rises by $12,000. Total amounts owed stay $60,000 until the shop starts paying principal.

Common mix-ups

Long-term liabilities are not current liabilities. A bill due next month sits in the current group; only the principal due after this year belongs here.

This grouping is not interest expense. Interest is the cost of using the money; this section is the remaining principal.

The current portion of a long loan is not leftover long-term debt. Once that slice is due within twelve months, it has left this grouping.

Related terms

• Liabilities: Everything the business owes to lenders, vendors, employees, and customers.
• Notes Payable: Formal loan balances owed to a bank or other lender.
• Lease Liability: The recorded obligation for future lease payments.
• Current Portion Of Long-Term Debt: The slice of loan principal due within the next twelve months.
• Debt Schedule: A supporting schedule tracking each loan's balance, payments, rate, and maturity.
• Balance Sheet: A statement showing what a business owns, what it owes, and what is left for owners at a single point in time.
• Debt-To-Equity Ratio: Total debt measured against owner equity.
• Covenant: A condition in a loan agreement the borrower must keep meeting.