What Is Long-Term Debt? Definition and Financial Accounting (2024)

What Is Long-Term Debt?

Long-term debt is debt that matures in more than one year. Long-term debt can be viewed from two perspectives: financial statement reporting by the issuer and financial investing. In financial statement reporting, companies must record long-term debt issuance and all of its associated payment obligations on its financial statements. On the flip side, investing in long-term debt includes putting money into debt investments with maturities of more than one year.

Key Takeaways

  • Long-term debt is debt that matures in more than one year and is often treated differently from short-term debt.
  • For an issuer, long-term debt is a liability that must be repaid while owners of debt (e.g., bonds) account for them as assets.
  • Long-term debt liabilities are a key component of business solvency ratios, which are analyzed by stakeholders and rating agencies when assessing solvency risk.

Understanding Long-Term Debt

Long-term debt is debt that matures in more than one year. Entities choose to issue long-term debt with various considerations, primarily focusing on the timeframe for repayment and interest to be paid. Investors invest in long-term debt for the benefits of interest payments and consider the time to maturity a liquidity risk. Overall, the lifetime obligations and valuations of long-term debt will be heavily dependent on market rate changes and whether or not a long-term debt issuance has fixed or floating rate interest terms.

Why Companies Use Long-Term Debt Instruments

A company takes on debt to obtain immediate capital. For example,startupventures require substantial funds to get off the ground. This debt can take the form of promissory notes and serve to pay for startup costs such as payroll, development, IP legal fees, equipment, and marketing.

Mature businesses also use debt to fund their regular capital expenditures as well as new and expansion capital projects. Overall, most businesses need external sources of capital, and debt is one of these sources

Long-term debt issuance has a few advantages over short-term debt. Interest from all types of debt obligations, short and long, are considered a business expense that can be deducted before paying taxes. Longer-term debt usually requires a slightly higher interest rate than shorter-term debt. However, a company has a longer amount of time to repay the principal with interest.

Financial Accounting for Long-Term Debt

A company has a variety of debt instruments it can utilize to raise capital. Credit lines, bank loans, and bonds with obligations and maturities greater than one year are some of the most common forms of long-term debt instruments used by companies.

All debt instruments provide a company with cash that serves as a current asset. The debt is considered a liability on the balance sheet, of which the portion due within a year is a short term liability and the remainder is considered a long term liability.

Companies use amortization schedules and other expense tracking mechanisms to account for each of the debt instrument obligations they must repay over time with interest. If a company issues debt with a maturity of one year or less, this debt is considered short-term debt and a short-term liability, which is fully accounted for in the short-term liabilities section of the balance sheet.

When a company issues debt with a maturity of more than one year, the accounting becomes more complex. At issuance, a company debits assets and credits long-term debt. As a company pays back its long-term debt, some of its obligations will be due within one year, and some will be due in more than a year. Close tracking of these debt payments is required to ensure that short-term debt liabilities and long-term debt liabilities on a single long-term debt instrument are separated and accounted for properly. To account for these debts, companies simply notate the payment obligations within one year for a long-term debt instrument as short-term liabilities and the remaining payments as long-term liabilities.

In general, on the balance sheet, any cash inflows related to a long-term debt instrument will be reported as a debit to cash assets and a credit to the debt instrument. When a company receives the full principal for a long-term debt instrument, it is reported as a debit to cash and a credit to a long-term debt instrument. As a company pays back the debt, its short-term obligations will be notated each year with a debit to liabilities and a credit to assets. After a company has repaid all of its long-term debt instrument obligations, the balance sheet will reflect a canceling of the principal, and liability expenses for the total amount of interest required.

Business Debt Efficiency

Interest payments on debt capital carry over to the income statement in the interest and tax section. Interest is a third expense component that affects a company’s bottom line net income. It is reported on the income statement after accounting for direct costs and indirect costs. Debt expenses differ from depreciation expenses, which are usually scheduled with consideration for the matching principle. The third section of the income statement, including interest and tax deductions, can be an important view for analyzing the debt capital efficiency of a business. Interest on debt is a business expense that lowers a company’s net taxable income but also reduces the income achieved on the bottom line and can reduce a company’s ability to pay its liabilities overall. Debt capital expense efficiency on the income statement is often analyzed by comparing gross profit margin, operating profit margin, and net profit margin.

In addition to income statement expense analysis, debt expense efficiency is also analyzed by observing several solvency ratios. These ratios can include the debt ratio, debt to assets, debt to equity, and more. Companies typically strive to maintain average solvency ratio levels equal to or below industry standards. High solvency ratios can mean a company is funding too much of its business with debt and therefore is at risk of cash flow or insolvency problems.

Issuer solvency is an important factor in analyzing long-term debt default risks.

Investing in Long-Term Debt

Companies and investors have a variety of considerations when both issuing and investing in long-term debt. For investors, long-term debt is classified as simply debt that matures in more than one year. There are a variety of long-term investments an investor can choose from. Three of the most basic are U.S. Treasuries, municipal bonds, and corporate bonds.

U.S. Treasuries

Governments, including the U.S. Treasury, issue several short-term and long-term debt securities. The U.S. Treasury issues long-term Treasury securities with maturities of two-years, three-years, five-years, seven-years, 10-years, 20-years, and 30-years.

Municipal Bonds

Municipal bonds are debt security instruments issued by government agencies to fund infrastructure projects. Municipal bonds are typically considered to be one of the debt market's lowest risk bond investments with just slightly higher risk than Treasuries. Government agencies can issue short-term or long-term debt for public investment.

Corporate Bonds

Corporate bonds have higher default risks than Treasuries and municipals. Like governments and municipalities, corporations receive ratings from rating agencies that provide transparency about their risks. Rating agencies focus heavily on solvency ratios when analyzing and providing entity ratings. Corporate bonds are a common type of long-term debt investment. Corporations can issue debt with varying maturities. All corporate bonds with maturities greater than one year are considered long-term debt investments.

What Is Long-Term Debt? Definition and Financial Accounting (2024)


What Is Long-Term Debt? Definition and Financial Accounting? ›

Long-term debt is debt that matures in more than one year and is often treated differently from short-term debt. For an issuer, long-term debt is a liability that must be repaid while owners of debt (e.g., bonds) account for them as assets.

What is a long-term debt in financial accounting? ›

Financial obligations that have a repayment period of greater than one year are considered long-term debt. Examples of long-term debt include long-term leases, traditional business loans, and company bond issues.

What is an example of a long term loan in accounting? ›

Long-term liabilities are typically due more than a year in the future. Examples of long-term liabilities include mortgage loans, bonds payable, and other long-term leases or loans, except the portion due in the current year.

What is the difference between short term and long-term debt in accounting? ›

Short term debt is any debt that is payable within one year. Short-term debt shows up in the current liability section of the balance sheet. Long-term debt is debt that are notes payable in a period of time greater than one year. Long-term debt shows up in the long-term liabilities section of the balance sheet.

Which of the following is an example of long-term debt? ›

What Are Examples of Long-Term Debt? Examples of long-term debt include bank debt, mortgages, bonds, and debentures.

What is long-term debt in simple words? ›

Long-term debt is debt that matures in more than one year and is often treated differently from short-term debt. For an issuer, long-term debt is a liability that must be repaid while owners of debt (e.g., bonds) account for them as assets.

Is long-term debt a financial instrument? ›

Long-term finance can be defined as any financial instrument with maturity exceeding one year (such as bank loans, bonds, leasing and other forms of debt finance), and public and private equity instruments.

How do you record a long-term loan in accounting? ›

The first step in recording a loan from a company officer or owner is to set up a liability account for the loan. Depending on the repayment time frame, the Account Type can be Other Current Liabilities (to be paid in full in one year) or Long Term Liabilities (to be repaid over more than one year).

What is another name for long-term debt? ›

Long term liabilities are also called non-current liabilities which are obligations or debts of an organisation or a business that is due in over a year's time or in other words, these are liabilities that need not be payable in the current accounting period.

What are the two major forms of long-term debt? ›

The two forms of long-term debt most often used to create capital are bonds payable and long-term notes payable. A bond is a contract between an investor and an organization known as a bond indenture.

What is the difference between debt and long-term debt? ›

Companies must report their current and non-current debt in the liabilities section of their balance sheets. Current debt is debt that they must pay within the next 12 months, while non-current debt is long-term financial obligations.

Is long-term debt the same as accounts payable? ›

A company's accounts payables comprise amounts it owes to suppliers and other creditors — items or services purchased and invoiced for. AP does not include, for example, payroll or long-term debt like a mortgage — though it does include payments to long-term debt.

What is the difference between short-term finance and long-term debt finance with examples? ›

Synopsis: In short-term loans, the repayment tenure is less than two years, whereas, in long-term, the repayment tenure is more than three years. Continue reading as we explore more about the two types of loans. No matter how well a company is performing, there are times when managing cash flow can be challenging.

What are the three important forms of long-term debt? ›

Debt Financing. Long-term debt is used to finance long-term (capital) expenditures. The initial maturities of long-term debt typically range between 5 and 20 years. Three important forms of long-term debt are term loans, bonds, and mortgage loans.

Which option is the best example of long-term debt? ›

Some common examples of long-term debt include:
  • Bonds. These are generally issued to the general public and payable over the course of several years.
  • Individual notes payable. ...
  • Convertible bonds. ...
  • Lease obligations or contracts. ...
  • Pension or postretirement benefits. ...
  • Contingent obligations.

Is long-term debt an asset or liability or equity? ›

The “Long Term Debt” line item is recorded in the liabilities section of the balance sheet and represents the borrowings of capital by a company.

What is an example of long-term debt Why? ›

Also known as long-term liabilities, long-term debt refers to any financial obligations that extend beyond a 12-month period, or beyond the current business year or operating cycle. Some common examples of long-term debt include: Bonds.

Is long-term debt the same as total debt? ›

While the long-term debt to assets ratio only takes into account long-term debts, the total-debt-to-total-assets ratio includes all debts.

Is long-term debt the same as total liabilities? ›

Key Takeaways. Total liabilities are the combined debts that an individual or company owes. They are generally broken down into three categories: short-term, long-term, and other liabilities.

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