Debt is any amount of money one party, known as the debtor, borrows from another party, or the creditor. Individuals and companies borrow money because they usually don't have the capital they need to fund their purchases or operations on their own. And it's expected that the debt will be repaid at a later date. There are different kinds of debt, both short- and long-term debt. In this article, we look at what short/current long-term debt is and how it's reported on a company's balance sheet.
- The short/current long-term debt outlines the total amount of debt that must be paid within the current year.
- Debts due for payment after the next 12 months are held in the long-term debt account.
- Because of the structure of some corporate debt, companies often have to pay back part of the principal to debt holders over the life of the debt.
What Is the Short/Current Long-Term Debt?
There's generally a lot of confusion with this item. How can something be both long and short? Despite appearances, this concept is not that complex. The short/current long-term debt is a separate line item on a balance sheet account. It outlines the total amount of debt that must be paid within the current year—within the next 12 months. Both creditors and investors use this item to determine whether a company is liquid enough to pay off its short-term obligations.
The current liability account or short-term debt entry is for debt that is to be paid off within the next 12 months, including short-term bank loans and accounts payable items. In some cases, the short-term liability may be due to be paid within the current fiscal year. If the account is larger than the company's current cash and cash equivalents, it may be a sign that the company could be in poor financial health because it has insufficient cash to repay its short-term debts.
There may also be a portion of long-term debt shown in the short-term debt account. This may include any repayments due on long-term debts in addition to current short-term liabilities.
If the account is larger than the company's current cash and cash equivalents, it may indicate the company is financially unstable because it has insufficient cash to repay its short-term debts.
Any debt due to be paid off at some point after the next 12 months is held in the long-term debt account. These debts may include financing or leasing obligations. Because of the structure of some corporate debt—both bonds and notes—companies often have to pay back part of the principal to debt holders over the life of the debt.
The principal amount 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.
Example of Short/Current Long-Term Account
Let's suppose company ABC 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, or $100 million for 10 years, per year in principal. Each year, the balance sheet splits the liability up into what is to be paid in the next 12 months and what is to be paid after that.
So in the first year, the company has to pay $10 million in principal, so this amount is held in the short/current long-term debt account. The remaining $90 million in the account is held in the long-term liability account on the balance sheet.