Notes

Explore the differences between current liabilities and long-term liabilities. Review examples of long-term and current liabilities, and see their characteristics.
What Are Current and Long-Term Liabilities?
Jim's Trucking has been in business for 5 years. They contract with a small grocery store chain to deliver inventory to local grocery stores. They would like to expand within a year and get a few more contracts with other small grocery store chains. Another, loftier goal of Jim's Trucking is to own 10 big rigs and start delivering inventory for one of the largest grocery store chains in the Midwest. However, the owner believes it may take 5 to 7 years to achieve this goal.

We can categorize Jim's Trucking goals as short- and long-term. The short-term goal is to obtain a few more contracts within a year, and the long-term goal is wanting to deliver inventory for the largest grocery store chain in 5 to 7 years.

Just as Jim's Trucking has short- and long-term goals to bring in more sales, there are also bills they will owe now and some that will be due later as they build their business. These bills are called liabilities. Liabilities are obligations that a business owes and are categorized as current and long-term. Current liabilities are obligations that are due within a year, while long-term liabilities come due in more than a year.

For the rest of this lesson, we will discuss current and long-term liabilities and how they are categorized. We'll also provide examples and determine on which financial statement you can find these types of liabilities.

Current Liability Examples
Current liabilities are obligations a business owes within a year. You can find these obligations on the balance sheet in the order in which they are due. Can you think of any current liabilities Jim's Trucking may have in the short-term?

Jim has employees who need to be paid every two weeks. On the balance sheet, we would total the amount due for a year and label it as salaries payable. Another example of a current liability would be taxes. Most taxes are due within a year. Therefore, sales tax they've collected from customers must be sent to the state taxing agency and federal tax they may not have yet paid to the federal government should also be listed.

Jim's Trucking may also have an account for office supplies. These supplies are purchased on credit. Credit is when a business allows its customers to take possession of the items and pay for them later. This would be considered an accounts payable on the balance sheet. A small dollar amount of accounts payable would typically be paid within a year.

Now, let's look at their long-term liabilities.

Long-Term Liability Examples
Long-term liabilities are obligations that will come due after a year. They are also listed on the balance sheet after the current liabilities section. Jim's Trucking's long-term liabilities can include their big rigs. These 18 wheelers are expensive; they can cost over $100,000 and payments certainly can last for more than a year, sometimes 5 to 7 years. These truck payments are noted on the balance sheet as truck loans.

Other long-term liabilities include payments on a building the trucking company is purchasing from the bank, which should be shown as a mortgage loan. Another long-term liability for Jim's Trucking could be a long-term loan to help finance truck repairs. These payments are due monthly, but the total loan may not be due for a few years. This type of loan would be listed as notes payable.

Lesson Summary
It's important for a business to understand who they owe now and later, hence the importance of categorizing liabilities as current and long-term. Liabilities are obligations that are owed and can be found on the balance sheet.

Current liabilities represent obligations that are due within a year. Examples include salaries and accounts payable. Accounts payable are small credit accounts where a business has allowed a customer to take possession of supplies or other items for a monthly payment and usually require full repayment of the total within a year.

Long-term liabilities are obligations that will be paid in more than a year. For example, Jim's Trucking's car and truck loans may last for 5 to 7 years. Long-term liabilities can also include a mortgage loan, where a business is making payments toward owning a building, which can last 15 to 30 years. A last example of a long-term liability is a long-term loan, where a business borrows money from a bank and agrees to pay the money back in longer than a year, depending on the size of the loan and payments.

Learning Outcomes
Following this video lesson, you should be able to:

Define liabilities
Differentiate between current and long-term liabilities
Identify examples of each type of liability and where each would be found on the balance sheet