What Is Operational Debt?

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Operational debt helps a firm finance activities in the short term.
Operational debt helps a firm finance activities in the short term. (Image: money image by Дмитрий Жук from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Senior corporate executives generally sign borrowing agreements to finance operating activities in the short and long terms. These activities relate to purchases, sales and marketing, human resources management and business partnerships.

Debt Defined

A debt is a liability, such as a short-term loan or long-term note, that a borrower must repay.

Operational Debt Defined

Operational debt consists of all liabilities that a firm incurs through its primary activities. It include accounts payable and taxes due.

Perception of Operational Debt

Senior managers pay special attention to operational debt because business partners--such as customers, lenders and suppliers--often gauge a firm's short-term economic robustness by calculating operational debt levels.

Types

Types of operational debt items vary by company and industry, but the most common are vendor payables, pension liabilities, salaries and taxes.

Accounting for Operational Debt

To record an operational debt transaction, such as inventory delivery, an accountant credits the vendor payable account and debits the purchases account.

Reporting Operational Debt

An accountant reports operational debt in a company's statement of financial condition, otherwise known as statement of financial position or balance sheet.

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