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.

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