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Glossary

Long-Term Liabilities

Long-term liabilities refer to financial obligations or debts that are due beyond a 12-month period, typically extending several years, on a company's balance sheet.

What are long-term liabilities?

Long-term liabilities refer to debts or financial obligations that a company owes to another party and are expected to be paid over a period longer than a year. These can encompass bonds, mortgages, and loans and are typically indicated in the liabilities section of a company's balance sheet.

How to calculate long-term liabilities

Determining long-term liabilities involves various methods. The discounted cash flow method, considering expected cash flows and applying a discount rate, offers a more accurate estimate of their present value. Alternatively, the bond amortization method bases calculations on scheduled payments and the bond's interest rate, more commonly used for bonds than other long-term liabilities.

The significance of understanding long-term liabilities

Recognizing a business's long-term liabilities is crucial for informed decision-making. They can significantly impact a company's future, including pension liabilities, long-term debts, and other commitments. Understanding these obligations helps owners plan effectively for the future to ensure meeting their commitments.

Contrasting long-term and short-term liabilities

Long-term liabilities are financial obligations payable over a period exceeding one year, while short-term liabilities are expected to be paid within a year. Examples of short-term liabilities encompass accounts payable, accrued expenses, and short-term loans.

Example of a long-term liability

A long-term liability represents a financial obligation payable over more than a year. Common examples include bonds, mortgages, and long-term loans, which, if not repaid punctually, can significantly impact a company's financial health. To manage such obligations, companies often maintain healthy cash flow and a sound credit rating.