I have a long term liability that was set up, as the payments have been made over the past 5 years, the payments were never applied to the liability so the balance was never reduced. I've made a JE to reduce the liability by debiting my liability account and crediting my loan payable account on my expenses. When I did this, obviously it reduced my expenses which is not giving me a true read. I know I need to make another JE but I'm not sure what account to Debit on the P&L and what account to credit on my Balance Sheet. Going forward I also need to know how to post this each month when my monthly payment is made to this loan so that my liability account stays current on my financials.

Thanks,
Michelle

When payment is made you will Credit cash for the total amount paid, Debit the loan for the principal that was paid, and Debit Insurance Expense for the interest part of the payment.

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I have a long term liability that was set up, as the payments have been made over the past 5 years, the payments were never applied to the liability so the balance was never reduced.

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So where were the payments charged? If they weren't charged on the books anywhere, then your checking account balance also doesn't agree with your ledger cash account.

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I've made a JE to reduce the liability by debiting my liability account and crediting my loan payable account on my expenses.

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What is a "loan payable account on your expenses"? A loan payable is a liability - it is not an expense. What expense are you actually talking about? There wouldn't be any credit to an expense if nothing was ever charged to begin with.

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When I did this, obviously it reduced my expenses which is not giving me a true read. I know I need to make another JE but I'm not sure what account to Debit on the P&L and what account to credit on my Balance Sheet.

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You need to look at where it should have been charged to begin with. As pready said, the principle is reducing the loan amount and the interest expense would be charged for the interest portion. The payments on principle are not an expense and should never end up in there. Debiting that loan is merely going to correct the balance in that account, assuming you debited the correct account. (You should find out what the balance was at the end of the year per the bank's records and make it match that.) Whatever else was paid in addition to that was interest - that's the expense. But it would be adding to the expenses, not subtracting from them.

If an entry was never made to begin with, then your cash account would be off as well, and that's one place you need to correct it through, in order to make the cash correct. If the cash was already credited, where was it charged to? If it wasn't charged properly, it needs taken out of wherever it was charged and put into the correct place. But I can't really fully answer that without knowing if the payments were ever recorded at all, and if so, how.

Theoretically, any past things that affect expenses should be adjusted to the beginning balance of the equity. (Capital if sole proprietorship/partnership or retained earnings if corp.) For instance, if you needed to charge off some interest expense, then rather than having that on your income statement, you would subtract it off the beginning balance in equity so that it's adjusted to where it should have been had you charged the expense in the past correctly. That doesn't affect the current year.

I could tell you exactly how to correct it, if I knew what was or was not recorded to begin with. That would take going back into the records when the checks were written and seeing what was done in the ledger accounts with those payments. It's always difficult to say how to correct something when we don't know exactly what happened to begin with.