I shared the basics of short-term assets and liabilities and how you can use that information to make sound business decisions in my previous posts. Long-term assets and liabilities are just as important and extend past the current year.
Sometimes it’s helpful to assess long-term assets against long-term liabilities to gain a picture of the money coming in to your business and leaving it in the future. To do this, you’ll need to understand what long-term assets you have and compare them to long-term liabilities.
This asset type is used for things not quickly converted into cash, which cannot be sold or consumed within a year or less. They include:
- Investments—Investments that are not expected to be sold within the year such as bonds, common stock, investments in assets not used in operation, long-term notes, pension funds or plan-extension funds. These assets are reported on the balance sheet at historical or market value.
- Fixed assets—Items that have a lifespan longer than one year and are used in operations such as machinery and equipment and buildings. They are depreciated over time.
- Intangible assets—Intangible assets are things like patents, copyrights, trademarks, franchises and organization costs. These assets may have infinite life and are not amortized.
Long-term liabilities incorporate items that you anticipate liquidating outside of the current year or cycle of operation. They are reported as the value of all remaining payments and include:
- Notes payables—This amount usually carries interest and is the amount your company owes to a creditor.
- Long-term debt—Current portion of a net debt that is payable over a long-term.
- Deferred income tax liability—Taxes due in the future for income already received and reported in your financials. A future tax liability is created when a company’s tax payable is less than its tax expense.
- Pension fund liability—Post retirement benefits of current or retired employees as contributions that are necessary for future payments.
- Long-term capital-lease obligation—This is a written agreement under which a property owner allows a tenant to use and rent the property for a specified period of time.
Understanding your liabilities is important. They are a claim against your business assets. Investors will want to know why you’re issuing new debt so be sure to note the reason why. Debt isn’t bad, especially if you have it because you’re investing in optimizing your processes and becoming more efficient.
The combination of your long-term assets and liabilities gives creditors and other interested parties the ability to see how your business is doing beyond the current year. It can help them decide whether or not they will extend credit to your business.