Definition
Long-term debt (or long-term liability) refers to loans and other forms of debt that are not due within the next 12 months. These financial obligations require periodic interest payments and a final principal payment upon maturity. Common examples include bonds, notes payable, and long-term lease obligations.
Examples
- Corporate Bonds: A company may issue bonds to raise money for long-term investments. These bonds usually have a maturity period of 10 years or more and require semi-annual interest payments.
- Mortgage Loans: Long-term loans used to finance real estate purchases where the loan term exceeds one year, often stretching to 15 or 30 years.
- Notes Payable: Promissory notes issued by a company with a maturity period beyond 12 months, often used for long-term financing.
Frequently Asked Questions
What qualifies as long-term debt?
Any financial obligation that extends beyond one year qualifies as long-term debt. Common forms include bonds, mortgages, and long-term leases.
How is long-term debt reported on financial statements?
Long-term debt is reported as a liability on a company’s balance sheet. It is typically divided between the portion due within the next year (current portion) and the remainder (non-current portion).
What is the impact of long-term debt on a company’s financial health?
Long-term debt can provide necessary capital for growth and expansion but also increases financial risk due to interest obligations and the requirement to repay the principal amount.
Related Terms
- Bond: A fixed income instrument representing a loan made by an investor to a borrower, typically corporate or governmental, with periodic interest payments and repayment of principal at maturity.
- Notes Payable: Written promises to pay a certain amount of money at future dates, used as long-term financing tools.
- Interest: The cost of borrowing money, typically expressed as an annual percentage rate.
- Principal: The initial size of a loan or the amount of financial debt, excluding interest.
Online References
Suggested Books for Further Studies
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, and C. William Thomas
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Fundamentals of Long-Term Debt: Accounting Basics Quiz
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