Long-term liabilities are pretty straightforward. They're any debt or obligation that a business owes, which will be paid over a year or more. Huh, that's longer than I keep a pair of shoes around for. Obviously, from a financial standpoint, a business should be careful that they aren't taking on too much debt. But on the other hand, long-term debt isn't a bad thing. For example, businesses can use long-term liabilities to get cash injections into the business, purchase expensive equipment, and much more. We will talk more about some different types of business loans in a later lesson. Right now, let's just focus on working with long-term liabilities. Before we get too deep into it though, let's hear from one of our experts to learn more about long-term liabilities. Sometimes a client will go and buy something big and they don't have the cash for it, so what are they going to do? They're going to get a long-term loan to pay this off. It could be called a long-term liability, it could be called a long-term obligation, but basically, what the client might be doing or business might be doing is borrowing money from a financial institution or lender and purchasing something with that loan, and then they have to pay it off. It's our job as the bookkeeper to get that loan set up on the books. As soon as I see something in the bank activity, maybe coming out of their checking account that says loan payment, that's sometimes is the first time I hear about it. As they decide to get a loan and they're making payments and you're going to obviously talk to your clients, say, "Did you get a loan for something? Can I have some information please?" Usually what I ask for is the actual loan document, what did you sign with the bank? Usually, the long-term obligations are amortized loans that have an amortization schedule. There'll be the document that they signed and how much they promised to pay, how much in interests. But then there's another sheet that we'll have every single loan payment listed, 1, 2, well, I don't know, 70, or however many payments there are, and it will show the interest portion of each payment and the principal portion of each payment. That document is so important because with every payment, the interest and the principal could be different unless it's a fixed loan, but mostly they're not. Interest is really large on each payment as the loan starts out. But as the payments happen, the interest portion gets smaller and smaller and smaller until the loan ends. You really need that amortization schedule because every month the payment will be the same coming out of the bank but you're going to have to go in through that payment transaction and actually do a split, meaning this much was interests, this much was principal. The interest portion goes to interest expense, the principal portion will be coded to the actual long-term liability or long-term obligation account that you set up when the loan was first taken. Hopefully, you'll see a clue somewhere in their accounting if they're not the client that's just going to come to you with that document. Really important to ask them for the loan documents, amortization schedules, whatever you can get, and then get it set up as a long-term liability on the books and start booking that interests-principals split payment, and that's how you handle a long-term obligation.
