What is Long-Term Debt on a Balance Sheet?
The Long-Term Debt category appears as a long-term liability on a Balance Sheet. The balance represents the total outstanding balances of all bank loans, mortgages and financial contracts.
Long-Term Debt is expected to be payable in a period that is longer than one year. The current portion of the debt, which is the amount due within one year, can be disclosed separately on the Balance Sheet under current liabilities.
The principal balance of the loan or mortgage payable at a specific date in time will be reported on the Balance Sheet and the interest is recorded as an operating expense on the Income Statement. The interest payments for loans and mortgages are using calculated by the banks and detailed on a repayment schedule.
When a company purchases a capital asset such as a vehicle through financing rather than leasing, the loan will be set up as a Long-Term Debt. The terms of the loan such as interest rate, length of term and monthly payments are inputted into an amortization schedule. The amortization schedule illustrates the principal and interest portion of each payment and the carrying value of the loan at the end of each period.
Commercial mortgages and loans may include covenants that require the corporation to fulfill certain conditions such as providing reviewed or audited financial statements before a set deadline or meeting defined ratios such as debt to equity or interest coverage each period. By having Long-Term Debt disclosed correctly on the Balance Sheet, the bank can quickly assess the financial health of a company and calculate the ratios for any loan covenants.
If you have any questions about Long-Term Debt or other Balance Sheet items, get in touch below.
Author: Grant Gilmour has been in the CA business since 1988, starting his own practice in 1994. His tax expertise encompasses tax planning, international tax issues, and Scientific Research and Development tax credits. He is a graduate of the CICA In-Depth Tax Course and in 2012, Grant received the CA Community Service Award and the Scout Leader Medal.