Bondholders review a company’s debt structure to understand internal factors that might prevent the business from repaying its outstanding loans. They also pay attention to external elements such as the state of the economy and business performance, trying to make sure market forces won’t have adverse effects on borrowers’ solvency and financial soundness.
A debt structure provides a historical window into a company’s liabilities, indicating to investors the maturity dates of corporate debts. The idea is to tell investors how soon the business must settle debts and whether it has the money to do so. The term “debt structure” draws on the concept of debt, which is a sum of cash a borrower must repay through periodic installments or in a lump-sum payment.
A statement of debt structure typically ranks corporate liabilities by factors such as maturity and security. Long-term debts become due within a period exceeding one year. Examples include bonds payable and notes due. Short-term, or current, debts mature within 12 months and include accounts payable, credit card balances, commercial paper and salaries due. A secured debt, such as a mortgage, requires that a borrower post collateral, whereas an unsecured liability does not mandate a financial guarantee.
Tools and Personnel Involvement
Accountants, financial managers and investment analysts help a company prepare an accurate debt-structure statement. To adeptly perform tasks, these professionals use such tools as financial analysis software and mainframe computers. Other tools include credit adjudication and lending management system software, also called CALMS; database management system applications; enterprise resource planning software; calendar and scheduling programs; and financial accounting, analysis and reporting software, also called FAARS.
For example, a company's debt statement shows the following data: loans payable within six and 12 months amount to $1 million and $500,000, respectively; debt due after one year amounts to $1.5 million. Total debts equal $3 million, or $1 million plus $500,000 plus $1.5 million. As a result, the organization's debt structure shows short-term debts at 50 percent ($1 million plus $500,000 divided by $3 million times 100) and long-term debts at 50 percent ($1.5 million divided by $3 million times 100).
Financial Accounting and Reporting
Monitoring a company's debt structure involves the accurate recording and reporting of loan proceeds. To post receipt of lender funds, a corporate bookkeeper debits the cash account and credits the loan payable account. To record debt repayment, the bookkeeper debits the loan payable account (to bring the account back to zero) and the interest expense account, crediting the cash account. The accounting concepts of debit and credit run counter to the banking terminology. Consequently, crediting cash means reducing company money. Accountants report debts in a statement of financial position, also known as a statement of financial condition or balance sheet.