Difference Between Liabilities and Long Term Debt
Liabilities represent amounts to be paid in the future by a company. They can be either long-term liabilities or short-term liabilities based on when the liability is to be paid in full. Long-term debt refers to a specific long-term liability that will not be completely satisfied during the course of the current year.
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Types
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Liabilities include short-term liabilities such as accounts payable, payroll taxes payable, corporate taxes payable, sales tax payable and the current portion of notes payable. Long-term liabilities include debt such as the portion of notes payable that will not be paid in the current year and shareholder loans.
Disclosure
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Repayment terms, applicable interest rates and collateral regarding long-term debt should be included in the notes to financial statements. Since short-term liabilities will be paid before the end of the next fiscal year, disclosure is often not necessary for short-term liabilities.
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Credit Lines
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It is rare to find a company that does not have any liabilities or long-term debt. Even companies that have sufficient cash to run the business often have credit lines secured to meet future obligations. The classification of a credit line balance as a short-term liability or long-term debt depends on the repayment terms. Although there may not be a balance outstanding on the credit line at any given point in time, the company should note that the credit line exists when issuing financial statements.
Interest Expense
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The interest portion of long-term debt payments is deductible by a company on its tax return. When recording payments made on long-term debt, the principal and interest portion of the payments must be separated to have a proper accounting at year-end. With the exception of the current portion of long-term debt, short-term liabilities generally do not have an interest expense component.
Considerations
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The mere existence of liabilities or long-term debt on a company's balance sheet is not a red flag for a poorly run business. The testing of certain ratios, such as debt to assets, debt to equity and long-term debt to equity, will provide a better understanding of the company's financial health. The average range of acceptable ratios varies from one industry to the next.
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References
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