Accounting 101: Long-Term Liability
What it is and why you should care about it!

When it comes to Accounting 101 and all the essential bookkeeping services business owners employ, long-term liability is one of the most important concepts to review.  Long-term liability is a claim on the assets of a business and it has a major impact on the financial health of an organization over time.  This is especially true if the long-term liability for a company is poorly recorded and poorly managed.   In Accounting 101 – Long-Term Liability we will show you how important these debts are for determining and preserving financial stability.


Accounting 101 - Long-Term Liability: What is it?

Typically, long-term liability is considered to be any liability that is due in more than one year.  Companies often secure long-term loans in order to obtain important assets that will be used for an extended period of time.  Essential equipment, commercial facilities and company autos are all examples of long-term liability.  These are often recorded in the accounting records for the business as "bonds payable" or "long-term notes payable".  They require a transfer of assets by a specific date as due payment for a purchase or action that has already occurred.

Managing the Balance Sheet In Accounting 101

While there are many topics that you will cover in Accounting 101, few are as important as the balance sheet and how to manage it properly.  This financial report gives businesses a comprehensive understanding of their overall financial well-being.  Adding the business owner's equity to the short and long-term liability for the business will reveal the company's total assets or net worth.  Using the chart of accounts to list long-term liability is a topic that is commonly explored in Accounting 101.

The Difference Between Current Liability And Short-Term Liability

All debts that are due and payable within the year are considered to be short-term liability or current liability.  Principal balances with a repayment period greater than 12 months are long-term liability.   These two debts together represent the total liability for the business.  

Accounting 101: The Positive Functions Of Long-Term Liability

Accounting 101 is so much more than learning to simply crunch numbers.  As a business owner you need to develop the ability to discern what these numbers mean for the future of your business and whether each debt or gain represents an opportunity for growth and increased financial health.  Short-term liability can be both positive and negative in that it can be representative of essential expenses for necessary portions of the operation or frivolous expenses that add no value the company.  When it comes to long-term liability, however, many of these debts are representative of items that perform positive functions for the business.  Not only might these items be critical for the maintenance of the operations overall, but these could contribute significantly to the growth and health of the business as well.

Those who succeed in gaining a comprehensive understanding of long-term liability in Accounting 101 will ultimately have the ability to determine the long-term impacts of a major purchase.  This can be critical when creating detailed reports concerning spending and expected returns on the related investments.  Excessive long-term liability can cause a business to become overwhelmed.  Therefore an important learning aspect in understanding your company’s finances is how to identify disproportionate borrowing and returns so that company leaders can be notified.

Summary

Modest and well-managed borrowing for assets that produce substantial returns can result in increased financial health.  Moreover, low-interest rates and manageable payments can allow for the acquisition of larger buildings and more innovative forms of equipment that will lead to expansion, increased profits and an improved bottom line.  Recognizing that maintaining a balance between assets and overall liability is essential for establishing and maintaining financial stability.


Please subscribe to my monthly newsletter, Bookkeeping Basics E-zine. It tells you each month about the new information that I have added, including some great tips and advice from myself and other Bookkeeping Basics readers.


Enter Your E-mail Address
Enter Your First Name (optional)
Then

Don't worry — your e-mail address is totally secure.
I promise to use it only to send you Bookkeeping Basics E-Zine.


Like Bookkeeping-Basics.net?


New! Comments

Share Your Comments, Tips & Advice! Leave a comment in the box below.