Sources of assets include current liabilities, long-term liabilities, and owners' equity. Liabilities are considered “temporary” sources of assets, whereas stockholders' equity is a more “permanent” source of assets. When a company borrows money, it does so with the expectation of using the borrowed funds to acquire assets that can be used to generate more income. The objective is to generate an amount of additional income which exceeds the cost of borrowing the funds (interest).
Long-term debt consists of probable future sacrifices of economic benefits arising from present obligations that are not payable within a year or the operating cycle of the business, whichever is longer. Bonds payable, long-term notes payable, mortgages payable, pension liabilities, and lease obligations are examples of long-term liabilities. This chapter will focus on the first two of these.