A company lists its long-term debt on its balance sheet under liabilities, usually under a subheading for long-term liabilities.
Key Takeaways
- Long-term debt is reported on the balance sheet.
- In particular, long-term debt generally shows up under long-term liabilities.
- 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.
Long-Term Liabilities
Any obligations a company bears for a time period that extends past the current operating cycle or current year (i.e., one year from the date the obligation was incurred)are considered long-term liabilities.
Long-term liabilities can be financing-related or operational. Financing liabilities are debt obligations produced when a company raises cash. They include convertible bonds, notes payable, and bonds payable. Operating liabilities are obligations a company incurs during the process of conducting its normal business practices. Operating liabilities include capital lease obligations and post-retirement benefit obligations to employees.
Both types of liabilities represent financial obligations a company must meet in the future, though investors should look at the two separately. Financing liabilities result from deliberate funding choices, providing insight into the company’s capital structure and clues to future earning potential.
Long-Term Debt
Long-term debt is listed under long-term liabilities on a company’s balance sheet. Financial obligations that have a repayment period of greater than one year are considered long-term debt. Debts that are due within the current year are known as short/current long-term debt. Included among these obligations are such things as long-term leases, traditional business financing loans, and company bond issues.
Financial Statements
Financial statements record the various inflows and outflows of capital for a business. These documents present financial data about a company efficiently and allow analysts and investors to assess a company’s overall profitability and financial health.
To maintain continuity, financial statements are prepared in compliance with generally accepted accounting principles (GAAP). Among the various financial statements a company regularly publishes are balance sheets, income statements, and cash flow statements.
Balance Sheet
A balance sheet is the summary of a company’s liabilities, assets, and shareholders’ equity at a specific point in time. The three segments of the balance sheet help investors understand the amount invested into the company by shareholders, along with the company's current assets and obligations.
There are a variety of accounts within each of the three segments, along with documentation of their respective values. The most important lines recorded on the balance sheet include cash, current assets, long-term assets, current liabilities, debt, long-term liabilities, and shareholders’ equity.
Debt vs. Equity
A company’s long-term debt, combined with specified short-term debt and preferred and common stock equity, makes up its capital structure. Capital structure refers to a company's use of varied funding sources to finance operations and growth.
The use of debt as a funding source is relatively less expensive than equity funding for two principal reasons. First, debtors have a prior claim in the event a company goes bankrupt; thus, debt is safer and commands a smaller return.
This effectively means a lower interest rate for the company than that expected from the total shareholder return (TSR) on equity. The second reason debt is less expensive as a funding source stems from the fact interest payments are tax-deductible, thus reducing the net cost of borrowing.
