Why Would My Balance Sheet Show a Negative Long-Term Liability?
Why Would My Balance Sheet Show a Negative Long-Term Liability?. The phrase "negative long term liability" does not appear to make sense at first reading: a negative liability would logically be an asset. In practice the phrase is occasionally used on balance sheets and in reference to balance sheets. Although the phrase can be explained in this context, it runs the risk of causing confusion and redundancy.
A balance sheet is one of the three main elements of a company's financial statements, also known as accounts, the other two being the income statement and the cash flow statement. While the latter two record a series of events over a period of time, the balance sheet is a snapshot covering a specific moment, namely the time at which the accounts are prepared. It shows the overall condition of the company's finances.
Assets and Liabilities
The balance sheet lists three measures. Assets are anything the company owns that has a measurable value. These can include cash, savings, investments, physical assets such as stock and intangible assets such as trademarks. Liabilities are money the company owes, such as unpaid rent, money owed to suppliers and loans from banks. The difference between the two is the shareholders' equity, i.e., what the company is worth to the shareholders. If liabilities exceed assets, the company is technically insolvent, though this doesn't mean it can't stay in business.
While companies categorize liabilities in various ways, it is common practice to divide them into current and long-term liabilities. Long-term liabilities generally will not come due during the next accounting period, which is usually one year. The distinction is important; excessive long-term liabilities may be a fundamental weakness, but excessive short-term liabilities are more likely to lead to cash-flow problems.
Negative Long-Term Liability
The phrase "negative long-term liability" is occasionally used in financial statements, but can cause confusion. It simply refers to the fact that a long-term liability has a negative effect on the overall balance of assets against liabilities, reducing shareholders' equity. It can be argued that the term is redundant as, for the company's financial health, any liability is inherently a negative. The phrase may also be used in another potentially confusing manner regarding the cash-flow section of a company's accounts. In addition to tracking the effects of a company's operating expenses, such as purchases and sales, the cash flow statement covers the effects of changes to assets and liabilities on the company's cash. When a long-term liability is first created, such as when a company takes a loan, it will normally have a positive effect on cash flow. When the liability is reduced or removed, such as when a company repays a loan, the change to the liability is a negative for the cash flow.
- SEC: Beginners' Guide to Financial Statements; May 2, 2007
- Florida Public Service Commission: Memorandum; Clarence J. Prestwood; April 13, 2011 (PDF)
- Nottinghamshire Police Authority: Draft Unaudited Statement of Accounts 2010/2011