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Long-term liabilities

Long-term liabilities are debts that do not have to be paid in the next twelve months. However, they have to be paid after one year. They are funds supplied to a business from sources other than the owner, and therefore represent claims on the business’s assets as can be seen from this accounting equation which is about assets, liabilities and owner’s equity of a business.

Assets = Liabilities + Owner's Equity

From the equation, the owner's equity is also a liability because it is an amount that the business is obliged to pay to its owner.

When a sum of money is received from an external source, it becomes a liability of the business as it places an obligation on the business to pay for it, and the liability is credited to a liability account. A good example is the money a depositer puts in a bank or other financial organization. The money deposited is an asset to the depositer but a liability, usually a long-term liability, to the bank

Examples of long-term liabilities are bonds payable, mortgage loan, long term notes payable, debentures, some bank debts that mature in a few years or more, and leases. A lease is a contract that obligates the user (lessee) of a tangible asset to make regular payments to the owner of the asset.

The portion of long-term liabilities payable within the next twelve months are treated as current liabilities, the remaining parts of the liabilities are long-term liabilities which are payable after one year.

Liabilities are shown on the right side of the balance sheet