Long-term liabilities are financial instruments that are anticipated to yield some sort of benefit later rather than sooner. Most financial experts tend to consider a liability that is not expected to realize a benefit for at least one calendar year to be considered long-term. Any liabilities that will be settled in full in less than twelve consecutive months are classified as current or short-term liabilities.
One of the more common examples of long-term debt liabilities would be a bank loan. Assuming that the payment schedule of the loan does not require total repayment within one calendar year, the loan itself can be considered a long-term liability. However, the entire balance of the loan will be categorized in different ways if a portion of the loan is due in the next twelve months.
For loans where some payment is due within the next year, that portion is usually referred to as a current liability, while the balance is considered a long-term liability. For example, if the total amount of the loan is broken into annual balloon payments, the balloon payment that comes due in the next twelve months would be classified as current, while the remaining payments would be considered long-term.
Mortgages are also a good example of long-term liabilities. As with the bank loan, any amount due on the mortgage in the next twelve-month period is considered to be current while the remainder of the outstanding mortgage balance is understood to be long-term debt. Depending on the terms of the mortgage, any interest or discounts that are applied to the outstanding loan balance may impact the exact amount of the current and long-term liabilities.
The classification of debt into short-term and long-term liabilities is often helpful in terms of organizing the accounting for a business or even for a household. In some countries, tax breaks are associated with carrying certain types of long-term liabilities. This makes it important to identify the exact amount of the debt that is not scheduled to be retired during the next twelve months. Claiming any tax breaks or exemptions that are relevant to the debt load can reduce the amount of tax debt, effectively allowing the individual or the company to keep more money in hand for use with other debts or projects.
Since financial rules and regulations vary somewhat from one country to the next, it is often a good idea to consult a professional accountant in order to determine the proper classification of various liabilities. An accountant can easily distinguish between short-term and long-term liabilities, and advise the client of any benefits that may be derived in the form of exemptions, assuming the debt is retired according to a specific schedule. Taking the time to assess the long-term liabilities balance can aid in planning long-term investments and expansion projects, as well as make it easier to claim any exemptions currently allowed by law.
