Current & Long-Term Liabilities: Definition & Characteristics

Current & Long-Term Liabilities: Definition & Characteristics
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  • 0:05 What are Current and…
  • 1:38 Current Liability Examples
  • 2:50 Long Term Liability Examples
  • 3:50 Lesson Summary
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Lesson Transcript
Instructor: Tammy Galloway

Tammy teaches business courses at the post-secondary and secondary level and has a master's of business administration in finance.

In this lesson, we'll define 'liabilities.' You'll also learn the difference between current and long-term liability. Finally, we'll discuss on which financial statement you'll find liabilities and provide examples of each type.

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.

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