Definition of Long Term Debt in Balance Sheet
Long term debt is the debt that the company owes to investors and which is payable after more than one years and since it is a liability and payable in more than one year, hence it is shown as a non-current liability in the balance sheet.
Long term debt is the debt item shown in the balance sheet. Since it is payable after more than 1 year, hence it is shown in non-current liabilities portion on the balance sheet. Examples of long term debts are 10,20,30 years bonds and long term bank loans etc. In the long term debt, some portion of the debt is to be paid in less than one year. That portion is shown as “Current portion of long term debt” and is shown under Current liabilities in the balance sheet. For example, in 10-years bonds, Companies have to pay the semiannual coupons to the debt holders. Coupon amount that needs to be paid in 1 year is kept as “Current Portion of long term debt” and is kept under current liabilities.
Component of Long Term Debt in Balance Sheet
As we mentioned earlier, long-term debt is having two components in the balance sheet. One under non-current liabilities and another in current liabilities. As we know that long term debts are payable in more than 1 year such as 10 or 20 years bonds, hence bonds are kept under non-current liabilities. But some portion of these bonds is to be paid in less than a year, hence that portion is kept under current liabilities.
Examples of Long Term in Balance Sheet
Following are the examples are given below:
Let’s assume Company XYZ was an unlevered company. It has just now taken a bank loan of $1,000,000 for 10 years. This bank loan will be equally amortized over 10 years. That means in the next 1 year $100,000 needs to be paid and the rest amount needs to be paid over the term of 10 years. So below can be the liabilities portion of its balance sheet:
|Current Portion of Long term Debt||$100,000|
|Long tern Debt||$900,000|
Pic: Liabilities portion of Company XYZ
Walmart is a US multinational retail organization, headquartered in Bentonville, Arkansas. Walmart was founded in 1962. Below is the snippet of its balance sheet from its 2020 annual report.
As, we can see here that as on 31st January 2020, it is having a long-term debt of $43,714 million which is almost similar to long-term debt on 31st January 2019. Though the Current portion of long-term debt increased from $1,876 million to $5,362 million.
Below is the break up of its long-term debt:
Modeling of Long Term in Balance Sheet
We will take the above example of Company XYX to understand, how the company will model $1,000,000 bank loan over 10 years. This bank loan will get amortized over 10 years. We can see below how the company will model that loan over 10 years:
As we have seen each year company will pay back $100,000 from the loan. So that amount will be shown in the “Current portion of long term debt”. Long term debt will also get reduced by $100,000 each year. This process repeats until year 10 when there is only $100,000 remaining to be paid and since that amount will be paid in the 10th year hence that amount will be shown under current liabilities and the long term debt amount will be zero.
Use of Long Term Debt in Balance Sheet
The main purpose of any kind of financing whether that is equity or debt is to raise capital to buy assets. That asset will eventually generate revenue for the business. Long term debt can also be used to leverage the company and to buy back the shares and to convert the company from public to private. Also, debt financing is cheaper than equity financing, so the company can prefer to raise the capital via debt and not by equity.
Companies use long term debt for various purposes which are in sync with their strategy. Advantages of long term debt that it can be paid easily over the years and the cost of debt is lower than the cost of equity. But companies need to keep in mind that they shouldn’t get overleveraged and then it may get hard for them to pay back investors.
This is a guide to Long Term Debt in Balance Sheet. Here we also discuss the definition and component of long term debt in balance sheet along with examples. You may also have a look at the following articles to learn more –