Active learning ideas
Long-term borrowings are essential for businesses looking to expand, but they come with significant risks and costs. Students learn how to account for non-current liabilities such as bank loans and bonds. They focus on the recording of the principal amount and the periodic interest expenses that must be matched against the company's income.
Activity 01
Students act as business owners applying for a 5-year loan. They must calculate the annual interest and show how the loan will appear as both a current and non-current liability over time.
How are long-term borrowings classified in the Statement of Financial Position?
Activity 02
Provide two companies: one with no debt and one with high debt. Students discuss in pairs which one is riskier during an economic downturn and which one might grow faster in a boom.
What is the difference between simple and compound interest?
Activity 03
Groups are given different interest rates and loan terms. They must calculate the total cost of borrowing and present a 'repayment schedule' to the class, explaining the impact on cash flow.
How does borrowing affect a company's liquidity and solvency?
A few notes on teaching this unit
Watch Out for These Misconceptions
The entire loan amount is always a non-current liability.
The portion of the loan principal due within the next 12 months must be reclassified as a current liability. A 'reclassification' exercise helps students see how the balance sheet changes at year-end.
Interest paid is the same as the loan repayment.
Interest is the cost of borrowing (an expense), while the repayment reduces the principal (a liability). Using a T-account simulation helps students see these as two distinct effects.
Methods used in this brief
Current Liabilities and Provisions
Examines the recognition and measurement of current liabilities, including trade payables and provisions. Students will differentiate between provisions and contingent liabilities.
8 methodologies
Equity of Limited Companies
Introduces the components of equity for limited companies, including share capital and retained earnings. Students will account for the issuance of shares and the declaration of dividends.
8 methodologies