How to Adjust the Long-Term Debt in Balance Sheets
Long-term debts are obligations a business has in which the payment terms exceed one year. They are sometimes referred to as long-term debts payable. They are shown in the balance sheet of the company's financial statements. When you make a payment on a long-term debt, you usually are paying both principal and interest. The interest is considered a business expense that carries through to the profit and loss statement, and the principal portion of the payment reduces the "long-term debt payable account" shown on the balance sheet.
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Instructions
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Record a long-term debt payment in the general ledger by crediting (reducing) cash and debiting interest expense for the interest portion of the payment and crediting (reducing) the long-term debt payable by the amount of the principal payment. For example, an accounting entry would look like this:
Credit cash for $500, debit interest expense for $400, and debit long-term debt payable $100. This way the debits and credits both equal $500.
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Record accrued interest by crediting accrued interest payable in the balance sheet and debiting interest expense in the profit and loss. When the accrued interest is paid, credit cash and debit (reduce) accrued interest payable.
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Summarize all transactions for long-term debts in the general ledger. This includes payments for principal, interest and the reduction of cash used to make the payments. At the end of the accounting period, you should have a new, reduced long-term debt balance accompanied by an increase in interest expense and a reduction of cash.
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Tips & Warnings
If you have a large long-term debt, allocate the portion of the debt that is due in less than a year as short-term debt in the balance sheet. This is because most balance sheets present assets and liabilities as short-term and long-term.
Accounting for debt reductions can be complicated, so you should consider hiring an enrolled agent, bookkeeper or certified public accountant (CPA) to help you with any accounting entries related to long-term debt.
