A:

A lot of confusion can arise with this balance sheet account. After all, how can something be both long and short? Despite appearances, however, this concept is not as complex as one might first think. The short/current long-term debt account on the balance sheet simply shows the portion of long-term debt that the company must pay in the next 12 months.

It is important to understand that the current liability account is for debt that is to be paid off within the next 12 months. Debt that is to be paid off at some point after the next 12 months is held in the long-term debt account. Due to the structure of some corporate debt (both bonds and notes), companies will often have to pay back part of the principal to debtholders over the debt's life. The principal amount that is being paid back within the current year is held in the short/current long-term debt account. Don't confuse this with interest being paid on debt during the current year, as that expense is housed in a separate account (interest payable).

For example, suppose ABC Company issues a $100 million bond that matures in 10 years with the covenant that it must make equal repayments over the life of the bond. In this situation, the company is required to pay back $10 million ($100 million/10 years) per year in principal. Each year, the balance sheet will split the liability up into what is to be paid in the next 12 months and what is to be paid after that. In the first year, for example, the company is required to pay $10 million in principal, so this amount will be held in the short/current long-term debt account. The remainder of the account ($90 million) is held in the long-term liability account on the balance sheet.

For more on this, see Reading The Balance Sheet, When Companies Borrow Money and Debt Reckoning.

RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
Related Articles
  1. Investing

    What’s Holding Back the U.S. Consumer

    Even as job growth has surged and gasoline prices have plunged, U.S. consumers are proving slow to respond and repair their overextended balance sheets.
  2. Credit & Loans

    What's a Nonperforming Loan?

    A nonperforming loan is any borrowed sum where the borrower has failed to pay scheduled payments for at least 90 days.
  3. Economics

    Understanding Cost of Revenue

    The cost of revenue is the total costs a business incurs to manufacture and deliver a product or service.
  4. Economics

    Understanding Cash and Cash Equivalents

    Cash and cash equivalents are items that are either physical currency or liquid investments that can be immediately converted into cash.
  5. Economics

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  6. Economics

    Explaining the Balanced Scorecard

    A balanced scorecard is a metric that measures a business’ performance.
  7. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  8. Investing Basics

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
  9. Investing Basics

    3 Companies That Hate Debt Financing

    Learn how companies such as Chipotle, Bed Bath & Beyond, and Paychex are able to maintain impressive levels of growth without debt financing.
  10. Fundamental Analysis

    The Economics of FanDuel

    Part of fantasy sports’ success lies in one-day and week-long contests serving as an alternative to season-long games. FanDuel, a leader in this space, has recently surpassed a $1 billion valuation.
RELATED TERMS
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
  2. Interest Coverage Ratio

    A debt ratio and profitability ratio used to determine how easily ...
  3. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  4. International Financial Reporting Standards - IFRS

    A set of international accounting standards stating how particular ...
  5. Corporate Social Responsibility

    Corporate initiative to assess and take responsibility for the ...
  6. Balance Sheet

    A financial statement that summarizes a company's assets, liabilities ...

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!