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. How safe are money market accounts?

    Learn the difference between a money market account and a money market fund. Both savings vehicles are relatively safe, but ... Read Answer >>
  2. Why is Belize considered a tax haven?

    Explore the factors that make Belize one of the most modern and corporate-friendly tax havens in the world, including its ... Read Answer >>
  3. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  4. Why would a homebuyer need to take out PMI (private mortgage insurance)?

    Learn why some home buyers are required to take out private mortgage insurance (PMI), and how it affects the total monthly ... Read Answer >>
  5. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  6. What are the disadvantages of a Roth IRA?

    Get informed about Roth IRAs, which have a few disadvantages, including limited access to funds and contribution limits based ... Read Answer >>
Related Articles
  1. Retirement

    A Guide to Arizona's State Retirement System

    The Arizona State Retirement System offers a defined-benefit plan for former teachers, state workers and public employees.
  2. Mutual Funds & ETFs

    2 Reasons to Be Wary of New ETFs (IFLY, EQLT)

    Pay attention to the number of thematic and smart beta ETFs that may fail to survive as a result of poor performance and thin trading volume.
  3. Forex

    Global Utilities: Exploring Revenue Trends & Fundamentals

    Analyze global revenue exposure in the utilities sector to learn about the impact of currency, regulation and economic growth on geographic contributions.
  4. Home & Auto

    4 Alternatives to a Traditional Mortgage

    If you can't qualify for or don't want a traditional mortgage, one of these options might be right for you.
  5. Home & Auto

    Understanding Mortgage Impound Accounts

    Home buyers with low down payments may get stuck with higher mortgage payments. Find out what you get for the extra money.
  6. Investing

    Municipal Bonds Offer Something More for Everyone

    Are municipal bonds really for me? The popular perception is that tax-exempt income only benefits those investors in the highest tax brackets.
  7. Retirement

    5 Top Alternatives to a Reverse Mortgage

    If you have substantial home equity and don't want to do a reverse mortgage to tap it for retirement expenses, cost out these viable alternatives.
  8. Credit & Loans

    What Is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  9. Home & Auto

    Understanding Mortgage-Backed Securities

    Find out the meaning of this popular asset-backed security and its benefits for banks and investors.
  10. Investing

    Berkshire Hathaway Stock: Capital Structure Analysis (BRK.A)

    Review the capital structure of Berkshire Hathaway, and understand how equity and debt capitalization and enterprise value may interact with each other.
RELATED TERMS
  1. Primary Mortgage Market

    The market where borrowers and mortgage originators come together ...
  2. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  3. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  4. Mortgage Originator

    An institution or individual that works with a borrower to complete ...
  5. Secondary Mortgage Market

    The market where mortgage loans and servicing rights are bought ...
  6. Mortgage Pool

    A group of mortgages held in trust as collateral for the issuance ...
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center