Long Term vs. Short Term Liabilities in Accounting
Liabilities are reported on a company balance sheet to indicate commitments for current or future spending. When reported with corresponding assets to offset liabilities, the balance sheet provides a streamlined presentation of the equity in the business. Understanding the classifications of your liabilities will assist with long-term financial planning, helping to protect the financial stability of your company.
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Duration
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Short-term liabilities are commitments that come due within 12 months or less. To qualify as a short-term liability, the settlement of the expense must have an impact on the cash account, or create another payable. For example, the liability must be paid out of the business cash account or transition to an accounts payable processing, where it awaits payment in accordance with the company's payable cycle.
Long-Term Liabilities
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Long-term liabilities carry through an entire accounting cycle that can lasts longer than 12 months. Long-term liabilities reflect an investment made for an extended period with a financial commitment to honor payments at a given point in the future, such as payments deferred over 12 months or more.
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Examples
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Short-term liabilities include accounts like wages payable, accounts payable, notes, taxes and interest. Long-term liabilities consist of investments like mortgage loans, operational expense or expansion loans and any bonds outstanding. The only expenses that cross both categories are long-term loans that you are currently making payments on. In those cases, recognize the current 12 months of payments as current liabilities and list the remaining balance as a long-term liability.
Reporting
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List your liabilities on the balance sheet after the assets. Liabilities are listed in the order that they come due, starting with current liabilities then listing long-term liabilities. The difference between the assets and liabilities is listed at the bottom of the report as stockholder or owner's equity.
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