Classification of Long-Term Debt

Long-term debts include bonds payable.

A company's senior management ensures that corporate liquidity levels are adequate to fund operating activities. Top leadership also makes sure the firm's balance sheet reflects an accurate classification of corporate debts.

Definition

A debt is a liability that a firm must repay. A long-term debt is a loan that a borrower must reimburse within a period longer than 12 months. To record a long-term debt, an accountant debits the cash account and credits the debt payable account. In accounting parlance, debiting the cash account means increasing it.

Types

Examples of long-term debts include bonds, lines of credits and loans. Long-term liabilities also may be financial promises that a business partner must honor after a year. For example, if a company co-signs a loan with a partner, the company is liable if the partner defaults.

Classification

A company classifies long-term debts in the balance sheet, also referred to as a statement of financial condition or statement of financial position. An accountant may classify long-term debts by maturity date or subordination. Subordinated debts, also called secured debts, are liabilities for which a borrower does not provide a collateral or financial guarantee.

References

• Investopedia: Long-Term Debt
• Investopedia: Corporate Bonds: An Introduction To Credit Risk
• Investopedia: What is the Short/Current Long-Term Debt Account on a Company's Balance Sheet?
• Investopedia: Subordinated Debt