Back to: Accounting 101
Welcome to today’s lesson!
Now, we’ll talk about long-term liabilities, which are debts or obligations a business needs to pay over a long period.
Introduction:
Long-term liabilities are debts that a business doesn’t need to pay in the short term, usually more than a year. These might include loans, bonds, or mortgage payments.
What are Long-Term Liabilities?
These are obligations that are due over a period longer than one year. For example, if a company takes out a loan to buy a building, they might repay the loan over 10 years.
Common Types of Long-Term Liabilities:
Loans and Mortgages: These might be for purchasing property, machinery, or equipment.
Bonds Payable: Bonds are a way for companies to raise large amounts of money by borrowing from investors.
Accounting for Long-Term Liabilities:
Businesses record these liabilities on the balance sheet. Over time, they will reduce the balance as they make payments, which will be reflected in the company’s financial statements.
Long-term liabilities are debts or obligations that a business is required to pay over a period of more than one year. Examples of long-term liabilities include loans, bonds, and mortgages. When a business incurs a long-term liability, it must record the transaction in its accounting records. For instance, if a company borrows ₦5,000,000 from a bank to finance the purchase of a new building, the transaction would be recorded as a debit to the building account and a credit to the long-term loan account.
The accounting treatment for long-term liabilities involves amortising the principal amount of the loan over its term. Amortisation is the process of gradually reducing the principal amount of a loan through regular payments. For example, if a company has a ₦5,000,000 loan with a term of 5 years, the annual amortisation would be ₦1,000,000. The company would also need to record the interest expense on the loan, which would be calculated as a percentage of the outstanding loan balance.
The disclosure of long-term liabilities is also an important aspect of accounting. Companies are required to disclose their long-term liabilities in their financial statements, including the nature of the liability, the principal amount, and the interest rate. This information helps stakeholders, such as investors and creditors, to assess the company’s financial health and risk profile. In Nigeria, the Financial Reporting Council (FRC) requires companies to follow the International Financial Reporting Standards (IFRS), which provide guidance on the accounting and disclosure of long-term liabilities.
Conclusion:
Long-term liabilities allow businesses to invest in large assets, but they must be managed carefully to avoid financial strain.
Evaluation:
If a business takes out a loan of N500,000 to buy equipment, how would this be recorded on the balance sheet?
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