Current vs Long-Term Liabilities: What’s the Difference?

As a business owner, you’ll probably incur some liabilities when running your business. Regardless what your business sells or does, you’ll need capital to perform its operations. You may already have some capital available, but in many instances, you’ll have to secure financing from an outside source, such as a bank or lender. With that said, not all liabilities are the same. There are both current and long-term liabilities, and it’s important that you familiarize yourself with these two primary types.

Current vs Long-Term Liabilities: What’s the Difference?

Overview of Liabilities

In business accounting, a liability is any legally binding obligation to pay money or assets to another party. In other words, it’s a debt. If your business owes money to a vendor or lender, the money owed is considered a liability and, thus, should be recorded on your business’s sheet. Liabilities are resolved, however, by meeting the obligations of the loan, which typically involves paying it back.

What Are Current Liabilities?

There are two types of liabilities in business accounting: current and long term. A current liability is money owed that’s due within one year. Any money owed by your business that requires a complete repayment within a period of 12 months is considered a current liability.

Common examples of current liabilities include the following:

• Sales taxes
• Payroll taxes
• Accounts payable
• Short-term loans
• Accrued liabilities

What Are Long-Term Liabilities?

A long-term liability, on the other hand, is money owed with a due date that’s longer than one year. When the terms of a loan — or any other legally binding financial obligation — give you more than one year to repay it, it’s considered a long-term liability. As with current liabilities, long-term liabilities are also recorded on your business’s balance sheet. The only real difference is that current liabilities have a repayment rate of less than one year, whereas long-term liabilities have a repayment date of longer than one year.

Common examples of long-term liabilities include:

• Long-term loans
• Pensions
• Deferred income taxes
• Mortgage loans

Which Is Better?

Neither current nor long-term liabilities are “better” than the other. With that said, current liabilities will have the biggest impact on your business’s cash flow. With their shorter repayment date, you’ll have to spend your business’s cash on hand to satisfy current obligations. As a result, too many current liabilities can disrupt your business’s cash flow.

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