Introduction to Long Term Liabilities for Kids & Adults

LONG TERM LIABILITIES:

"Long Term Liabilities" are borrowings that a person or an organization owes and needs to repay over a long time, usually more than a year. These liabilities often involve regular payments or instalments that continue for an extended period, like several years or even decades. Examples of long-term liabilities include home loans, car loans, education loans, and other types of debts that take a considerable amount of time to payoff.

Examples of Long-Term Liabilities (for kids):

1. Home Loan: Imagine your parents borrowed ₹10,00,000 from a bank to buy a house. They will pay it back every month for 20 years.

2. Education Loan: Sometimes, students or their parents borrow ₹5,00,000 from a bank for college fees. They repay it in small portions each month for 10 years.

3. Car Loan: When your parents want to buy a car, they borrow ₹3,00,000 from a bank. They will return it over 5 years by paying a fixed amount every month.

4. Personal Loan: Your uncle borrowed ₹1,00,000 from a bank for his wedding. He will repay it in monthly instalments over 7 years.

5. Mobile Phone Contract: Imagine you want to buy a new mobile phone, but you can't afford the full price upfront. You decide to sign a contract with a mobile service provider, where you pay a fixed amount every month for a certain duration, like two years. This is a long-term liability because you're committing to pay a fixed amount every month for an extended period.

Examples of Long-Term Liabilities (for Adults):

1. Home Mortgage: If you want to buy a house, but you don't have enough money, you can take a home loan from a bank. You'll make regular payments, including both the principal amount borrowed and the interest, over many years.

2. Car Loan: When you decide to purchase a car, you can borrow money from a bank. You'll then repay this amount with interest over a specific duration, usually in monthly instalments.

3. Personal Loan: If you need money for personal reasons, like a wedding or medical expenses, you can borrow it from a bank. You'll have to pay back the borrowed amount, along with interest, over a long period through regular instalments.

4. Bonds: Companies or the government may borrow money from people by issuing bonds. Bondholders lend their money for a fixed period and receive regular interest payments. The principal amount is returned to them when the bond matures.

5. Debentures: Companies can raise capital by issuing debentures, which are similar to bonds. Investors lend their money for a specified time and receive regular interest payments. The principal amount is repaid at the end of the debenture's term.

The Formulas commonly used to calculate long-term liabilities:

1. EMI Calculation Formula: This formula helps to calculate the Equated Monthly Instalment (EMI) amount for loans that are repaid in fixed monthly instalments. The EMI includes both the principal amount borrowed and the interest charged. The formula is:

        EMI = (Principal Amount * Monthly Interest Rate * (1 + Monthly Interest Rate) ^ Loan Tenure) / ((1 + Monthly Interest Rate) ^ Loan Tenure - 1)

In this formula, you need to know the principal amount (the total borrowed), the monthly interest rate (the yearly interest rate divided by 12), and the loan tenure (the number of months you have to repay the loan).

2. Simple Interest Formula: This formula helps calculate the interest payable on a loan or investment that has a simple interest structure. The formula is:

            Simple Interest = Principal Amount * Interest Rate * Time

Here, you need to know the principal amount (the total borrowed or invested), the interest rate (the percentage charged for borrowing or earned on an investment), and the time (the duration in which the interest is calculated).

3. Compound Interest Formula: This formula is used to calculate the interest that is earned or charged on a loan or investment with compound interest. Compound interest is interest that is added to the principal amount and then earns interest itself. The formula is:

        Compound Interest = Principal Amount * [(1 + Annual Interest Rate / Compounding Frequency) ^ (Compounding Frequency * Time)] - Principal Amount

In this formula, you need to know the principal amount (the total borrowed or invested), the annual interest rate (the percentage charged for borrowing or earned on an investment), the compounding frequency (how often the interest is calculated), and the time (the duration in which the interest is calculated).

Long-term liabilities are like long-lasting promises to pay back money over an extended period. Whether it's lending toys, saving money, borrowing books, sharing treats, or planting seeds for kids, or home loans, car loans, and education loans for layman adults in the Indian context, these examples help explain the concept of long-term liabilities in simple terms.