Difference Between Long Term and Current Liabilities with Examples
Long-term liabilities are financial obligations that a company must pay after more than 12 months. Understanding long-term liabilities is crucial for accounting exams, business knowledge, and making informed financial decisions. This topic helps students master balance sheet classification for school, commerce, and competitive exams.
| Type of Liability | Examples | Due Period |
|---|---|---|
| Current Liabilities | Accounts Payable, Short-term Loans, Outstanding Expenses | Due within 12 months |
| Long-Term Liabilities | Debentures, Long-term Loans, Bonds, Mortgage Payable | Due after 12 months |
Long-Term Liabilities Meaning
Long-term liabilities refer to debts and financial obligations which are payable beyond one year from the balance sheet date. They include loans, bonds, and debentures taken to finance long-term assets. In accounting, these are also known as non-current liabilities. Understanding this classification is essential for preparing and reading final accounts.
Key Features of Long-Term Liabilities
- Payable after 12 months from the reporting date.
- Usually used to finance fixed assets like land, buildings, or machinery.
- Recorded under the ‘Non-Current Liabilities’ section in the balance sheet.
- Include principal loans and sometimes interest accrued but not yet due.
- Help assess a company’s solvency and risk for exam-based questions.
Examples of Long-Term Liabilities
- Term loans taken from banks for more than one year.
- Debentures and bonds issued to raise funds.
- Mortgage loans secured against property.
- Lease liabilities (for leases exceeding 12 months).
- Pension obligations and deferred tax liabilities.
| Example | Typical Description | Reported As |
|---|---|---|
| Debentures | Funds raised by issuing financial instruments | Non-Current Liabilities |
| Long-term Bank Loan | Loan from a bank repayable over 5 years | Non-Current Liabilities |
| Mortgage Payable | Secured loan against company property | Non-Current Liabilities |
| Pension Liabilities | Amount owed to employees in future pensions | Non-Current Liabilities |
| Deferred Tax Liabilities | Taxes owed in future due to timing differences | Non-Current Liabilities |
Long-Term Liabilities on Balance Sheet
On a balance sheet, long-term liabilities are shown under the ‘Non-Current Liabilities’ section below current liabilities. They are clearly separated to help analyze the company’s obligations. Detailed disclosures are often given in the notes to accounts as per accounting standards and regulatory norms.
Sample Balance Sheet Extract
| Liabilities | Amount (₹) |
|---|---|
| Current Liabilities | 15,000 |
| Non-Current Liabilities Debentures Long-term Bank Loan |
40,000 35,000 |
Difference Between Current and Long-Term Liabilities
| Feature | Current Liabilities | Long-Term Liabilities |
|---|---|---|
| Due Period | Within 1 year | After 1 year |
| Examples | Trade Payables, Bills Payable | Debentures, Mortgage Loan |
| Placement in Balance Sheet | Above long-term liabilities | Below current liabilities |
| Impact on Solvency | Shows short-term liquidity | Shows long-term financial health |
Accounting Treatment of Long-Term Liabilities
Long-term liabilities appear in the balance sheet’s non-current liabilities section. Their outstanding balances and terms are described in the notes to accounts. Parts due within one year get classified as current for the next period. Entries are passed when obtaining funds, accruing interest, and during repayments. Refer to Final Accounts for full reporting rules.
Importance of Long-Term Liabilities in Business and Exams
Long-term liabilities help businesses raise funds for acquiring fixed assets and expansion. These obligations impact solvency and financial ratios like the debt-equity ratio (Solvency Ratio). For students, correctly identifying and reporting these liabilities is vital for scoring marks in accountancy and competitive exams.
Practice Questions on Long-Term Liabilities
- State any three examples of long-term liabilities seen on a balance sheet.
- Differentiate between current and long-term liabilities with two points each.
- Explain the accounting treatment for a five-year term loan.
- Where are debentures classified on the balance sheet?
- How do long-term liabilities affect the solvency ratio?
- Give one real-life example where a company uses a long-term liability.
- In a balance sheet, where is a loan maturing in 18 months shown?
Related Topics and Further Reading
- Non-Current Liabilities
- Difference Between Assets and Liabilities
- Balance Sheet
- Final Accounts
- Debentures
- Classification of Assets and Liabilities
- Accounting Equation
- Current Liabilities
- Solvency Ratio
- Ratio Analysis
In summary, long-term liabilities are crucial for understanding a company’s financial structure. They enable business growth, support exam preparation, and help interpret financial statements. At Vedantu, we simplify such Commerce concepts with clear explanations and practical examples for school, board exams, and beyond.
FAQs on Long Term Liabilities Explained with Examples and Balance Sheet Placement
1. What are long-term liabilities with examples?
Long-term liabilities are financial obligations due for payment beyond one year. Examples include loans, debentures, and bonds. These appear on the balance sheet under non-current liabilities.
2. What is the difference between current and long-term liabilities?
The key difference lies in the payment due date. Current liabilities are payable within one year, while long-term liabilities are due after one year. This distinction is crucial for financial statement analysis and assessing a company's liquidity and solvency.
3. How are long-term liabilities shown on a balance sheet?
Long-term liabilities are presented in the balance sheet under the non-current liabilities section, separate from current liabilities. This clear segregation helps users understand a company's financial structure and long-term obligations.
4. What are examples of current and long-term liabilities?
Current liabilities include accounts payable, short-term loans, and salaries payable. Long-term liabilities include long-term loans, debentures, bonds payable, and mortgages. Understanding this difference is key for accurate financial reporting.
5. Do long-term liabilities include debentures?
Yes, debentures are a common type of long-term liability representing a company's debt obligations. They're usually long-term borrowing instruments used to raise capital.
6. Are long-term liabilities a debit or credit in accounting?
In accounting, liabilities, including long-term liabilities, have a credit balance. This reflects the increase in obligations for the business.
7. What is the meaning of long-term liabilities?
Long-term liabilities refer to a company’s financial obligations with a maturity date exceeding one year. They represent long-term financing and are a critical part of a company’s capital structure.
8. How do long-term liabilities affect financial ratios?
Long-term liabilities significantly influence financial ratios like the debt-to-equity ratio and the times interest earned ratio, providing insights into a company's financial risk and leverage.
9. What are the top 10 liabilities?
The 'top 10' liabilities vary by industry and company size. However, common examples include long-term debt, accounts payable, deferred revenue, unearned revenue, salaries payable, taxes payable, interest payable, lease liabilities, pension liabilities, and customer deposits.
10. Can long-term liabilities be reclassified as current?
Yes, if a portion of a long-term liability becomes due within the next year, it is reclassified as a current liability. This reflects the imminent payment obligation.
11. Why do companies prefer long-term debt over short-term?
Companies often prefer long-term debt because it offers better financial flexibility, reduces short-term repayment pressure, and aligns with the lifespan of long-term assets such as property, plant, and equipment. This improves the company’s asset-liability matching.
