Long Term Debt

Posted in Finance, Accounting and Economics Terms, Total Reads: 680
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Definition: Long Term Debt

Any financial instrument or obligation with a maturity of more than one year is a long term debt.

It is generally accompanied by interest payments on the principal borrowed and appears on the liability side of the company’s balance sheet. The most common long term debts are in the form of a bankloan, mortgage bonds, debenture, or other obligations not due for one year.

For Example: Let's assume Company X borrowed Rs.10000 from the bank and now must repay  Rs. 1000 of the loan every month for the next 10 years.

Before borrowing Rs.10000

After borrowing Rs. 10000

Cash

Rs. 10,000

Cash

Rs. 20,000

Accounts recievable

Rs. 5,000

Accounts recievable

Rs. 5,000

Inventory

Rs. 3,000

Inventory

Rs. 3,000

Total current assets

Rs. 18,000

Total current assets

Rs. 28,000

Net fixed assets

Rs. 50,000

Net fixed assets

Rs. 60,000

Total assets

Rs. 68,000

Total assets

Rs. 68,000

Accounts payable

Rs. 13,000

Accounts payable

Rs. 13,000

Accrued liablities

Rs. 15,000

Accrued liablities

Rs. 15,000

Current portion of LT debt

Rs. 0

Current portion of LT debt

Rs. 10,000

Total current liablitlies

Rs. 28,000

Total current liablitlies

Rs. 28,000

Long term debt

Rs. 0

Long term debt

Rs. 10,000

Shareholder's equity

Rs. 40,000

Shareholder's equity

Rs. 40,000

Total liablities + shareholders equity

Rs. 68,000

Total liablities + shareholders equity

Rs. 68,000

Rs. 1,000 goes in current liability because this Rs 1,000 has to paid in one year rest of the money i.e. has to paid in the next nine years so this Rs.9000 will be classified as long term debt under long term liability in the liability side of the balance sheet.


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