Chapter 12 - Trade Payables and Long term Borrowings

 Now lets move to Trade payables and long term borrowings😀.

☝What are the difference between a short term borrowing/trade payable and a long term borrowing?

Ans:

💥Classification - A Short term borrowings is presented as a current liability in the balance sheet. While a long term borrowing is presented as a non current liab in the balance sheet. 

💥Duration - A long term borrowing is usually taken up by the business to buy non current assets or to have capital to expand the business. While a short term borrowings helps a company overcome a temporary cash shortage.

💥Interest- Short term borrowings do not have interest to the loan while a long term borrowing has. 

💨Items that impact a trade creditor account

• Trade Discount ( not recorded)
• Cash Discount
• Return Outwards 

☝Lets try a question below to understand the 3 items

Having understood the trade payable and their various items, lets move on to long term borrowings😀

A long term borrowings has 2 components namely the 1. Principal and 2. Interest.

1.Principal

When a Company takes up a bank loan, the journal entry is as such:-

Dr Cash at bank

Cr Long term borrowing

When a Company repays a bank loan, the journal entry is as such:-

Dr Long term borrowing

Cr Cash at bank

In the balance sheet, you need to split the principal sum to 1. Current and 2. Non current portion. 

Current portion would means that the loan amount is paid by the end of the next financial period, while non current would means it will be paid only after the end of the financial period. 

☝Lets try the below question on Long term borrowings - Principal

💨Now lets go onto interest expenses:)

💨On a long term borrowing, the company who is the borrower is expected to pay interest on the principal amount at an interest rate agreed upon the loan agreement.

The formula will be: :- 

Interest for the whole year: Principal X interest rate 

💡When a business pays interest the journal entry are as below:-

Dr Interest expenses

Cr Cash at bank

💡For interest which are not paid but incurred at the year end

Dr Interest expense

Cr Accrued Interest expense

** it is this accrued interest expenses calculations which normally confuses a lot of mypoateacher students.

Lets try on a question on Long-term borrowings - Interest: 

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