Shawn has a masters of public administration, JD, and a BA in political science.
Debt is money a company has borrowed and must pay back to the lender, often with interest, or money that is owed for goods and services already received by a company. In accounting, debt is classified as either short-term debt or long-term debt.
Short-term debt is debt that must be paid within one year. It shouldn't be much of a surprise to learn that long-term debt is debt that is not due for a year or more. Both types of debt are reported as liabilities on a company's balance sheet.
Debt and Financial Obligations
It's important to understand that not all liabilities are debts, even though all debts are liabilities. Let's look at some examples to illustrate the difference. Probably the simplest example of debt is a bank loan. A bank loans you money and you have to pay it back within a certain time, usually with interest. This loan is both a financial obligation and a debt. In the most basic sense, debt is money you have borrowed, and financial obligations are not.
Now let's consider wages you pay to employees on a biweekly basis. The day before payroll is due, you have a financial obligation to pay your employees, but not yet. It's an obligation but not a debt because it is not owed at this time. However, if you fail to pay your workers on time, the financial obligation also becomes a type of debt because you have basically borrowed the use of money that isn't yours - the money you should have paid your employees.
Example of Short-Term Debt
Let's look at two common forms of short-term debt.
- Accounts payable is money owed by a company for purchases of goods and services that it has received but not yet paid. Usually there is no interest charged if the payment is made in a timely manner - typically within 30 or 60 days of invoicing.
- Short-term notes payable are loans that are due within one year. They are usually bank loans but don't need to be. Sometimes, private parties, investors, or the company's owners may loan the company money. Usually, a company will give the lender a promissory note, which is a special type of loan agreement where the borrower unconditionally promises to pay the lender. Interest is usually charged with the loan.
A debt is money owed by the company to a person or organization. It's basically money borrowed by a company for a business purpose that must be paid back, often with interest, or money owed to another for goods or services received for which payment has not been made. A short-term debt is a debt that must be paid within one year, while long-term debt is not due for a year or longer. Short-term and long-term debts are types of business liabilities that are reported on a company's balance sheet.
- debt: money a company has borrowed and must pay back to the lender, often with interest, or money that is owed for goods and services already received by a company
- short-term debt: debt that must be paid within one year
- long-term debt: debt that is not due for a year or more
- accounts payable: money owed by a company for purchases of goods and services that it has received but not yet paid
- short-term notes payable: loans that are due within one year
- promissory note: a special type of loan agreement where the borrower unconditionally promises to pay the lender. Interest is usually charged with the loan
The terms and content of this lesson can provide you with the knowledge necessary to:
- Distinguish between short-term debt and long-term debt
- Understand that not all liabilities are debts, even though all debts are liabilities
- Stipulate two common forms of short-term debt
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