Long term debt is defined as debt that matures in a period longer than one year from the date of the balance sheet. Generally accepted accounting principles (GAAP) requires the presentation of long term debt in two parts. The current portion of long term debt (the amount due within one year from the balance sheet date) is presented in the current liabilities section of the balance sheet, and the remainder (the amount due longer than one year from the balance sheet date) is presented in the long term liabilities section of the balance sheet. Potential investors can determine a company's risk exposure by calculating the long term debt to capitalization ratio.

Calculate the current or short term portion of the debt by adding up the principal payments due each month during the company's fiscal year. Deduct this total from the total balance of the debt and enter it in the current liabilities section of the balance sheet. The account for this current portion is usually named Current (or Short term) portion of note (or loan) payable.

Post the remaining portion of the debt in the long term liabilities section of the balance sheet. This account is usually named Long term portion of note (or loan) payable. Each subsequent year, the short term portion of the debt is deducted from the total loan balance and moved to the current liabilities section of the balance sheet.

Record additional information on the debt in the Notes to Financial Statements. GAAP requires disclosure of the terms of the note, the interest rate and the amounts of principal due in each of the next five years from the balance sheet date. This disclosure helps financial statement users make decisions about the companies obligations into the future.

Determine a company's risk exposure related to long term debt by calculating the long term debt to capitalization ratio. The formula is: Total long term debt divided by the sum of the long term debt plus preferred stock value plus common stock value. Preferred stock and common stock values are presented in the equity section of the balance sheet. For example, if the long term debt is $400,000, the preferred stock value is $50,000 and the common stock value is $100,000, the ratio is .73. Generally, a company that finances a higher portion of its capital with long term debt is a riskier investment than a company that finances a lower portion of its capital with long term debt. This ratio allows investors to compare the relative risk in investing in various companies.

Things You Will Need

  • Balance Sheet

  • Computer