Long-term liabilities are represented by debts whose maturity is after one year (1), or the normal cycle of its operations is greater. They originate from the need for financing of the company, either for the acquisition of fixed assets, cancellation of bonds, redemption of preferred shares, etc. The most common long-term liabilities within companies are: Mortgage Loans and Bonds or Obligations payable.
The Amortization tables serve to reflect how the payment of a debt contracted is being made, mainly represented by large investments that the company wants to make and where it moves to what are called "long-term documents payable", since, Huge amounts of money cannot be paid at the moment, because it would occur in the event that the company runs out of liquidity (unless it is a type of company where cash is its form of payment continuously and not by checks). These investments generate interest and expenses, therefore, it is necessary to keep track of what is being amortized (paying or spending the debt).
In this work, items that belong to long-term liabilities will be taken into consideration, such as: mortgages payable, deferred credits, long-term effects payable and the amortization fund.
They are all those debts that are represented by documents, mortgages, or titles; and whose maturity in the long term is greater than one (1) year for those companies that have it due to their special characteristics.
Mortgages to pay.
Concept: They are loans contracted by companies but duly guaranteed with property and real estate, and on which the transfer or encumbrance cannot weigh without due cancellation.
Characteristics:
- The loans have guarantees that are derived from the mortgaged property.If the debtor does not comply with the payment, the mortgage will be foreclosed, auctioning the property and the creditor or lender will collect the amount of the mortgage principal, the interest that they have caused, the Legal expenses and any other expenses for which the breach of the same has been incurred The creditor does not necessarily become the owner of the mortgaged property The mortgage must be duly registered in the Public Registry for it to have legal effects and to be able to act in case of not complying with the clauses established at the time of the loan.
Accounting treatment:
1.- At the beginning of the operation.
| Bank | xxxxxx | |
| Deferred interest | xxxxxx | |
| Mortgages to pay | xxxxx |
2.- When canceling the fee.
| Mortgages to pay | xxxxx | |
| Interest expenses | xxxxx | |
| Deferred interest | xxxxx | |
| Bank | xxxxx |
3.- In the event of a mortgage auction.
| Bank | xxxxx | |
| Mortgages to pay | xxxxx | |
| Interest expenses | xxxxx | |
| Legal expenses | xxxxx | |
| Accumulated depreciation of the asset | xxxxx | |
| Auction loss (*) | xxxxx | |
| Active (**) | xxxxx | |
| Deferred interest | xxxxx | |
| Auction profit (*) xxxxx |
(*) It will be profit or loss in auction, depending on the result.
(**) It will depend on the mortgaged asset, in case it is a land, the accumulated depreciation account would not appear.
Amortization table.
Real estate purchases of certain types of equipment are often financed through the issuance of long-term documents that require a series of installment payments. These payments (called “debt service”) can be due semi-annually, monthly or quarterly or at any other interval. If these installments continue until the debt has been fully paid, it is said that the loan is being fully amortized. Often, however, installment documents contain a "due date" by which the remaining unpaid balance must be paid in a single "balloon payment."
Some documents require the payment of fees that correspond to the periodic interest charges (an “interest only” document). Under these terms, the principal of the loan is due on a specific maturity date. More often, however, the installment payments are greater than the amount of interest that accrues during the period. Therefore, only a portion of each payment of each installment payment represents an interest expense and the remaining amount of the payment reduces the principal of the liability. As the amount owed is reduced with each payment, the portion of subsequent payments that represents interest expense will decrease and the portion directed to principal payments will increase.
Preparation of the amortization table.
In order to analyze the content of a table, the mode of payment must first be taken into consideration, with which it is going to be amortized, either monthly, quarterly or semi-annually. Therefore, the values of the payments (column A), the interest expense (Column B), and the reduction in the unpaid balance (Column C) will be calculated according to time.
The data in the table are:
- Interest periods (Issue date) Payment date Payment (either monthly, semi-annual or quarterly) (Column A) Interest expense (Column B) Reduction in unpaid balance (Column C) Unpaid balance (Column D).
The interest rate used in the table is of special importance; this rate must coincide with the period between payment dates. Therefore, if payments are to be made on a monthly basis (for example), column B of interest expense should be based on the monthly interest rate and so on.
An amortization table is made with the original amount of the liability that heads the column of unpaid balances. The monthly payment values shown in column A are specified by an installment agreement. The monthly interest expense, shown in column B, is calculated for each month by applying the monthly interest rate to the unpaid balance at the beginning of that month. The portion of each payment that reduces the value of the liability (Column C) is simply the remaining amount of the payment (Column A - Column B). Finally, the unpaid balance of the liability (Column D) is reduced each month by the amount indicated in column C.
The preparation of each horizontal line in an amortization table represents the elaboration of the same calculations based on a new unpaid balance.
Record with table data.
Once an amortization table has been prepared, the entries to record each payment will be taken directly from the values that appear in it. These are recorded as follows:
- Distribution of payment between interest and principal.
| Interest expenses | xxxxx | ||
| Documents payable in installments | xxxxx | ||
| Cash xxxx | |||
| P / R payment made on document | payable in installments |
- To record the second payment.
| Interest expense xxxxx | |
| Documents payable in installments xxxxx | |
| Cash xxxxx | |
| P / R second payment on document by | pay in installments |
- Adjusting seat at the end of the year.
| Interest expense xxxxx | |
| Interest payable xxxxx |
P / R Adjustment entry for interest expense on the document payable in installments.
Deferred credits.
Concept: they are income that has not been earned or earned and that correspond to different periods of time. Its fundamental characteristic is that they do not require an outlay of money or income. Among these we can mention: rents collected in advance, the premium in issuance of obligations, deferred gross profit in installment sales, excess of the book value over the cost of the shares in subsidiary, etc.
Deferred credits are non-monetary items but they can be converted into liabilities, if so, they would become monetary items, therefore, in times of inflation of more than one digit, the effects of the loss of power must be recognized in the results. of purchase of the bolivar (case of Venezuela) due to inflation effects.
Accounting treatment: deferred credits must be valued the same as liabilities due to their characteristic of being able to become a liability if they are not accrued, therefore, it will be their nominal value or payment restitution and those that are in foreign currency will be valued at the listing on the date the financial statements are prepared, except for the excess of the book value over the cost of investments in subsidiaries, which will be determined by the difference between the acquisition cost of the shares acquired and their book value.
Long-term effects payable.
Concept: they are short-term obligations backed by credit documents such as: bills of exchange, promissory notes, etc. In general, they are subject to the payment of interest, therefore, the accrued at the closing date must be recorded as a current liability in an accrued expense account. Those obligations that, by virtue of their nature, cannot be adequately classified within the items or accounts that are presented separately within current liabilities, must be presented as “other accounts payable”.
Sinking fund.
They are reserves in currencies that are created monthly to support the payment of an expense that is going to be made on a certain date, such as: utilities.
Conclusion.
All long-term liabilities are reflected in payments that will be made in periods greater than one (1) year. Like all liabilities, mortgages are commitments that the company acquires in real estate, the costs of tax, notarial and professional fees and are considered as part of the acquisition cost of the property. But, if they are constituted as collateral for loans intended to strengthen working capital, these costs must be considered as a deferred expense, which will be amortized over the duration of the mortgage loan.
The Sinking Fund is nothing more than the currency reserves that are made in order to support large payments that can be made before the end of the year, such as profits and prevent the company from taking off in a single moment large sums of liquidity.
Deferred credits are non-monetary items but they can be converted into liabilities, if so, they would become monetary items, therefore, in times of inflation of more than one digit, the effects of the loss of power must be recognized in the results. of purchase of the bolivar (case of Venezuela) due to inflation effects.
Bibliography.
For the preparation of this work, the following texts were consulted:
- From ALTUVE, Rosa Aura. "Superior Accounting". Universidad de los Andes (ULA), Faculty of Economic and Social Sciences. Accounting and Finance Department. Mérida, State of Mérida-Venezuela. 1998 MEIG AND MEIG, Bettner Whittington. "Accounting. The Basis for Managerial Decisions ”. McGraw Hill Publishing. Tenth edition. 998.
LONG TERM PASSIVES
Contributed by: María Barrera
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