Financial Statement Series: Balance Sheet, Part 4, Long-Term Liabilities

Dear readers so far, we have covered current assets and liabilities, as well as long-term assets. It is time for us to bring our attention to the long-term liabilities. No one likes them but alas without them most businesses wouldn’t exist.

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Long-term liabilities

This group consists of any liabilities that stretch past a year. In lament terms these are the amounts you pay over a longer period. Therefore, there are numerous numbers of long-term liabilities a business could have. Here we will discuss the most common ones.

Notes payable

Notes payables are like accounts payable, except for two aspects. Notes payables due date is generally longer than a year and are usually backed by an explicit contract. The amount owing could be due to vendors, shareholders, or any other entity.

Long-term loan (debt)

These are loans that have a repayment schedule exceeding a year, such as mortgages or bank loans. It is extremely important for you to pay attention to the terms of theses and to separate the interest and principal payments when recording them. It is also important to ask for the amortization table for these and review them to make sure you understand the terms and conditions, when the payments are due and where your money is going. It is also important to pay attention to any covenants put forth in them. Most bank loans have financial covenants attached to them that dictate if you are allowed to take on other debts and ask for financial ratios and information on monthly or quarterly bases.

Please also shop around when looking for loans as they are not all the same and a 0.5% difference in interest rates makes a very big difference in the long run and some covenants can hinder the growth and sustainability of your business.

Let’s look at a simplified version of an amortization schedule and discuss its unique attributes.

1. Amortization schedules outline the payments you need to make to pay a loan off and how the payment allocated to the principal versus the interest changes over time.

2. It is particularly important to note that early on the loan terms, the interest portion will be at its highest, and the amount going towards the principal may be quite small.

3. As the loan gets closer to maturity the amount of interest you pay will decrease and the principal repayment will grow larger.

The below formula for calculating the monthly principal due on an amortized loan is at follows:

• Principal payment = TMP - (OLB * Interest rate / 12 months)

• TMP = Total monthly payment

• OLB = Outstanding loan balance

Let’s see a quick example of the above. Let’s say you take on a $150,000 loan in September 2025 with a 14-month term, 5% interest, $11,052.14 monthly payments, with the first payment being due the first of September.

• We are going to calculate the principal payment in September 2025.

• Principal payment = $11,052.12 – ($150,000 * 5% / 12) or $10,427.12, this can also be calculated as the opening – ending balance.

This means that in the first month you paid $625 worth of interest and remainder went towards the principle.

The below amortization schedule shows the payments and their allocation to interest and loan for the full duration of the loan.

As you can see the interest paid decreases as the loan matures with the last interest payment consisting of only $45.86.

The schedule above can also be used for mortgages, amortization of intangible assets and many others. It is important to understand to read these tables as they give you a lot of information on your financial situation.

Capital leases

These are the leases where you will own the asset for the term of the leases and therefore the lease payments are treated as debt. Please note they will have a similar amortization table as above to show the terms, payments, interest paid and so on.

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Summary 

There are many other long-term liabilities we could look at but the above are the ones that you will come across a lot more often than not.

I hope that this brief overview was helpful and like always feel free to reach out to a professional to discuss any concepts you need clarification on. We at KLV accounting offer free consultations on many different topics and are always happy to help.

In the next blog we will discuss equity which is the last section of the balance sheet and then we can move on to the income statement.

For a free consultation, call us at 403-679-3772 or email us at info@klvaccounting.ca.

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