Current portion of long-term debt definition
/What is the Current Portion of Long-Term Debt?
The current portion of long-term debt is a amount of principal that will be due for payment within one year of the balance sheet date. It is stated in a separate line item in the balance sheet. A sample presentation of this line item appears in the following balance sheet exhibit.
This line item is closely followed by creditors, lenders, and investors, who want to know if a company has sufficient liquidity to pay off its short-term obligations. If there do not appear to be a sufficient amount of current assets to pay off short-term obligations, creditors and lenders may cut off credit, and investors may sell their shares in the company.
A company can keep its long-term debt from ever being classified as a current liability by periodically rolling forward the debt into instruments with longer maturity dates and balloon payments. If the debt agreement is routinely extended, the balloon payment is never due within one year, and so is never classified as a current liability.
It is possible for all of a company's long-term debt to suddenly be accelerated into the "current portion" classification if it is in default on a loan covenant. In this case, the loan terms usually state that the entire loan is payable at once in the event of a covenant default, which makes it a short-term loan.
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Example of the Current Portion of Long-Term Debt
A business has a $1,000,000 loan outstanding, for which the principal must be repaid at the rate of $200,000 per year for the next five years. In the balance sheet, $200,000 will be classified as the current portion of long-term debt, and the remaining $800,000 as long-term debt.
Current Debt vs. Long-Term Debt
Current debt refers to the portion of a company’s total debt that is due within one year, such as short-term loans, the current portion of long-term loans, or lines of credit, and it is reported under current liabilities on the balance sheet. In contrast, long-term debt represents obligations that are not due within the next year, such as bonds payable, long-term leases, or loans with extended repayment periods, and is recorded under non-current liabilities. The distinction is important for assessing a company’s short-term liquidity versus its long-term solvency. While current debt pressures immediate cash flow management, long-term debt impacts future financial commitments and interest expense planning.