When you borrow money from a bank, lender, financial institution or utility provider, this can be termed as a debt. You retain these until you pay them back. There are a number of different types of debt, with different lengths of time defined by lenders until you have to pay the money back. Debts can be classified as either long term or short term. But what is the difference? What is long and short term debt? Let’s find out.
What is Long and Short Term Debt? Definitions.
In accounting terms, financial bods refer to short term debt as current liabilities. Current liabilities are debts that you intend to repay within one year. Similarly, financial companies refer to long term debts as long term liabilities in accounting parlance. These are debts that are due for you to pay after one year.
Examples of short term debt include payroll taxes, short term leases, bills due such as rent, water, and electricity. Examples of long term debt include deferred expenses and bonuses that are due within the next financial year.
Differences
Obviously company debt is very different to personal debt. Just take a look at the personal debt management services here to see what I mean. An important metric which you can calculate from looking at the balance sheet is the debt to equity ratio. This is a safety ratio that gauges the burden of the debt within the company. This essentially labels the risk associated with it. One can calculate this ratio by dividing the company’s total liabilities by its total equity.
What is Long and Short Term Debt? Equity
How you interpret the debt to equity ratio differs from industry to industry, for example, it is common for high tech companies to have a debt to equity ratio of under 0.5, whilst it is common for capital intensive industries to have a debt to equity ratio of above 1.5 or even 2. It is considered acceptable for capital intensive industries to have this higher debt to equity ratio as their debt will be backed by more tangible assets than a high tech companies debt.
Conclusion
In conclusion, company debt can be a double edged sword – a little debt within the company can accelerate earnings and company growth, whilst too much debt can severely hinder the company by becoming too much of a burden and even leading to the company going bankrupt.
