Definition of Book Value of Debt
Organizations engage in borrowing to seek financing for operating activities, long-term initiatives and reorganization initiatives, such as mergers and acquisitions. Adequate debt valuation procedures help firms prepare accurate financial statements.
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Debt Definition
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A debt is a loan that a borrower must repay at the maturity date or over a number of defined periods. A debt may also be a financial commitment that a company must honor on time. Examples include salaries and accounts payable (short-term debt) and bonds payable (long-term debt).
Book Value of Debt
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The book value of debt equals the loan principal plus accrued interest. This value may be different from data on financial markets because debt indicators, such as interest rates, fluctuate daily.
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Significance
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The book value of debt helps senior management gauge the company's financial health at a given point. For instance, top executives may review the firm's working capital to measure cash available in the short term. Working capital equals current assets, such as cash and accounts receivable, minus current liabilities.
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References
- Photo Credit Debt concept - cutting a credit card image by Sophia Winters from Fotolia.com
