Recent Articles

Long Term Debt – Financial Statement Presentation

Long Term Debt Presentation and Analysis

Long Term Debt is one of the multiple forms of capitalizing a business.  It includes bonds, secured notes and mortgage notes.  In the world of small business, the most common form of long term debt is secured notes, most likely with recourseAs an owner of a business you need to understand how this information is presented in your financial statements.  In addition, there are various presentation formats and as the owner; you are free to use the one best suited to your needs.

The following sections explain total liabilities on the balance sheet and the traditional presentation format for liabilities.  The next section identifies different reporting formats for long term debt.  The final section relates to the notes you may wish to include with your financial statements.  Throughout this article, I’ll explain some analysis tools for the small business entrepreneur to use in evaluating his long term debt.

      Total Liabilities

As an owner, you need to key in on the terminology used when discussing debt.  In general, all debt whether short term or long term is referred to as ‘Total Liabilities’.  It is divided into two distinct groups for purposes of interpretation.  Those liabilities due soon (technically less than one year) are referred to as current liabilities and those beyond one year are referred to as long-term liabilities.  In law, almost any form of a long term liability is in some form of a contract (note) attached to the particular loan.  It is rare for any long term debt to exist without formal documentation.  Thus the documentation recognizes the debt obligation as long term.  Typically any debt obligation without documentation is considered ‘On Demand’ which means the lender can demand the payment right now which makes the debt automatically short term or ‘Current’.

As a reminder, the balance sheet is split into two halves:  Assets (upper half) and the Liabilities and Equity (bottom half).

Each half has several sections.  The following is a simplified presentation format:

Assets  Upper Half
Current Assets
Fixed Assets
Other Assets                           __________
Total Assets                                                    $ZZZ,ZZZ

Liabilities and Equity  Lower Half
Current Liabilities
Long-Term Liabilities        ___________
Total Liabilities                                              $ZZZ,ZZZ
Equity                                                              ZZZ,ZZZ
Total Liabilities and Equity                           $ZZZ,ZZZ

This article is focused on the section referred to as Long-Term Liabilities, also known as Long Term Debt.  In accounting we used the term liabilities instead of debt.  For all intents and purposes, they are one in the same in this article.

Believe it or not, all notes have some form of amortization associated with extinguishing the principle portion of the loan.  Effectively, each payment is comprised of two components, interest and principle.  With each payment made, the principle balance on the loan decreases, therefore with the next payment the interest earned on that principle balance is a little less.  Since the payments are steady, this means that as payments are made, the principle portion of each payment increases and the interest portion decreases until the final payment is mostly principle and a little interest.  The following summation schedule related to a basic five year auto loan illustrates this on an annual basis.

Dennis purchases a pickup truck for his roofing business.  He agrees to borrow $10,000 from the bank and pay this loan back over five years.  The interest rate is 6%.  His monthly payments begin in January (makes it easy to present the information) and ends in December five years later.  What are his total payments, total interest and principle per year over the five year period?

             Total Payment   Total Interest Paid    Total Principle Paid
Year 1       $2,319.94              $551.91                  $1,768.03
Year 2         2,319.94               442.86                    1,877.08
Year 3         2,319.94               327.08                    1,992.85
Year 4         2,319.94               204.17                    2,115.77
Year 5         2,319.94                 73.67                    2,246.26
Totals       $11,599.70           $1,599.69                  $9,999.99  *.01 Rounding Error

The above illustrates the declining incremental amounts for interest each year and the increasing incremental amounts for principle for the total payments.

In accounting, we use a formal presentation format in both the current and long-term sections of the bottom half of the balance sheet.  This is what the current liabilities section looks like in a detailed format:

Current Liabilities
   Accounts Payable                                  $ZZ,ZZZ
   Credit Cards                                            Z,ZZZ
   Accrued Payroll                                     ZZ,ZZZ
   Taxes                                                      Z,ZZZ
   Unearned Revenue                                      ZZZ
   Deposits                                                 Z,ZZZ
   Lines of Credit/Bank Notes                    ZZ,ZZZ
   Current Portion of Long-Term Debt          Z,ZZZ
Total Current Liabilities                                        $ZZ,ZZZ

Did you notice that the very last account is entitled ‘Current Portion of Long-Term Debt’?  This is because current liabilities are defined as any amounts due within the next year of operations.  So if we were in May of the current year, this line of information would have the principle portion of long term debt that is due in the current month through April of the following year.  Typically these reports are prepared at month’s end so therefore this line of information would be the amount of principle payable from June of the current calendar year through May of next year.  Remember, you would have already paid May’s principle payment because this is the last day of the month when the balance sheet is prepared.

So using the amortization schedule above, let’s go to the last day of Year 3, i.e. December 31, 201X.  How much is the current portion of this truck loan?  Easy enough, it’s the amount Dennis will pay in principle in year 4, which is $2,115.77.

If the current portion of the long term debt is recorded in the current liabilities section, then the remaining principle for this loan would be the amount in the Long-Term Liabilities section of the report.  By the way, the remaining portion is Year 5’s amount of $2,246.26.

The Liabilities Section of the balance sheet will look like this:

Current Liabilities  (A more concise presentation format for ease of understanding)
   Accounts Payable                                    $ZZ,ZZZ
   Accrued Payroll/Taxes                              ZZ,ZZZ
   Other Liabilities                                       ZZ,ZZZ
   Current Portion of Long-Term Debt               2,116
   Total Current Liabilities                                        $ZZ,ZZZ
Long-Term Liabilities
  Vehicle Notes(Net of Current Portion)            2,246
   Equipment Notes                                     ZZ,ZZZ
   Bonds                                                    ZZ,ZZZ
   Total Long-Term Liabilities                                     ZZ,ZZZ
Total Liabilities                                                    ZZZ,ZZZ

As a reader of this information, you would simply add the current portion due to the long term portion and you have the total aggregated principle value for your long term debt.

OK, so now I can continue to explain the various presentation formats because you now have an understanding of the concept of total liabilities.

Reporting Format and Interpretation

There are many presentation formats for long-term debt.  I generally endorse the matching format over others as it is easier to understand and relate the information to the operations of the business.  So the following are different presentation formats for you to see and then I’ll discuss each one as illustrated.

Traditional Presentation

In the traditional presentation format, there is no correlation related to the use of the funds received.  In the financial reports of huge corporations, all you will see in the long-term liabilities section of the balance sheet is the term ‘Long-Term Debt Net of Current’ and then the dollar figure.  What the presenter has done is to combine all the debt into one line item on the report.  For example, here is Walmart’s presentation:

Walmart’s 2014 Balance Sheet – Liabilties Section

This opens in another tab, you just flip between the two tabs to review the information as I illustrate below.  The long term debt line is about 3/4’s of the way down the page.

This is from Walmart’s 2014 report (their fiscal year ends on Sept 30th).  By the way, all the numbers are in MILLIONS of dollars.  So that $41,771 is actually $42 Billion.  Remember, Walmart’s annual sales exceed $470 Billion. 

Long term debt is one line and look up in the current liabilities section; it shows the current portion of long-term debt.  This is required under Generally Accepted Accounting Principles for publically traded companies.

So in your small business, you can do the exact same thing, one line, ‘Long-Term Debt’.  Nothing illegal or immoral; but will it serve you well?  How about a more detailed format?

Detailed Format

In a detailed format, the presenter can create some form of correlation related to the funds borrowed.  The most common detailed format presentation relates to the duration of the respective notes and loans.  The following is a simple presentation format, I’m leaving out the current portion of the long term debt as that is in the Current Liabilities section and you should have an understanding of its value at this point.  If not, please go back up to Total Liabilities and refresh yourself.

Long Term Liabilities
  Notes/Loans Less Than 5 Years to Maturity            $ZZZ,ZZZ
  Notes/Loans 5 – 10 Years to Maturity                       ZZZ,ZZZ
  Extended Maturity > 10 Years                                  ZZZ,ZZZ
 Total Long-Term Liabilities                                     $ZZZ,ZZZ

You can determine your own breaking points.  In farming, often the notes are tied to maturity of livestock, so you’ll have points breaking at 7 years, up to 18 years and then longer term notes.  So you are free to use your own logical points.  Another detailed format, ties the debt to the actual assets purchased with that debt.  This is the presentation format I personally prefer as it allows the owner an easy way to understand his debt relationships as pointed out in Long Term Debt. 

Asset Matching Format

This method of reporting debt on your balance sheet is the most appropriate for the small business owner and management team.  The asset matching method correlates the respective debt instruments to the actual fixed asset groups on the balance sheet.  The following is an illustration of this format with explanation to follow:

This is an example of the fixed assets section of a balance sheet, notice the detailed presentation format:

Fixed Assets
  Real Estate                                 $ZZZ,ZZZ
  Transportation                                ZZ,ZZZ
  Equipment/Machinery                     ZZ,ZZZ
  Technology                                    ZZ,ZZZ
  Furniture & Fixtures                       ZZ,ZZZ
  Accumulated Depreciation           (ZZZ,ZZZ)
Fixed Assets Netted                  $ZZZ,ZZZ

For matching purposes, the respective financing arrangements related to the respective lines of assets should also be presented in an alignment fashion as follows:

Long-Term Liabilities (Net of Current Portion)
  Mortgages/Deed of Trust                         $ZZZ,ZZZ
   Vehicle Financing                                       ZZ,ZZZ
   Bank Notes (Equipment/Machinery)            ZZ,ZZZ
   Financing Arrangements                             ZZ,ZZZ
Total Long-Term Liabilities                  $ZZZ,ZZZ

For the owner, it is easy to compare the various types of debt to the corresponding assets so you can rationalize the commitment.  In addition, it makes it easy to identify any upside down issues.  There are several relationship associations that as an owner you should consider when using this presentation format.

  1. The fixed asset is recorded at the purchase price. In accounting, we use depreciation to adjust the value related to its use in business operations.  The problem is that depreciation is recorded as a lump sum against all the assets in the ‘Accumulated Depreciation’ account.  Depreciation is not recorded to each of the respective groups whereby the dollar value presented reflects the actual adjusted amount.  That dollar value is the original purchase price value.  So when comparing the remaining value of financing against that respective asset group, the ratio will decline from year to year (or at least it should).

As an example, let’s use the real estate line.  Suppose this asset was purchased 10 years ago for $350,000 and the company borrowed $300,000.  Last year, the remaining balance on the long-term portion net of current portion was $273,000 and this year the remaining balance is $266,400.  But the value on the real estate line is still $350,000.  During the 10 year period, the depreciation equates to 59,500 in the prior year and $65,000 in the current year.  The depreciation values come straight from the depreciation schedules in your books.  If you compare the presented format against the depreciated format, the following are your results:

                                           REAL ESTATE
LTD Ratio Presented Format               LTD Ratio w/Depreciation
Prior Year     .78  (273,000/350,000)          .94 ((273,000/(350,000 – 59,500))
Current Year .761 (266,400/350,000)         .935 ((266,400/(350,000 – 65,000))
LTD = Long Term Debt

There is no doubt the presented format will always show a continuous decline in the ratio, but the depreciation format may not.  This is because often with fixed assets, the depreciation adjustment is greater than the principle payment portion in the early years and then less than the principle portion during the later years of the loan.  This is because the principle payment portion of each payment increases over time.  Often depreciation is linear or accelerated in the earlier years and significantly less in the later years.

As an owner, you need to comprehend this business dynamic when interpreting the information presented.  The advantage this presentation format has is that it allows you to compare the values with greater ease and thus understand what is going on with the money.

  1. Financing arrangements in the long term liabilities section cover both the technology and the furniture and fixtures in the business. A good example relates to the copier.  Often, it isn’t a note that is used for the copier, but a financing arrangement.  You say ‘Tomato’, I say ‘Tomatoe’.  Basically they are the same thing.  The difference is that financing arrangements limit themselves to the particular asset financed.  Whereas most bank notes cover not only the asset purchased, but anything else that is not already attached to some form of financing.  Basically, you sign away all assets not currently used as collateral with bank notes.  So in the presentation format above, the financing arrangements relate to existing technology and fixtures recently purchased and not the historical items that you still retain (such as the postage meter, or the deluxe typewriter and so on).

Just as in the real estate mortgage ratio illustrated above, the assets do not reflect the depreciated status.  So again, think this through when evaluating your long-term debt position related to the respective fixed asset group.

  1. When evaluating machinery and equipment, often these items are customized or built directly for your purpose. In effect, there isn’t much of a market related to this equipment.  Some items still have a market such as transportation shop equipment (lifts, alignment devices, and electronic analysis) or lathes in metal fabrication.  But some custom made equipment for manufacturing or packaging don’t have a ready market available.  Honestly, who needs a ‘Cupcake Sorter’?

As an owner, you need to be aware of this, in effect the value of the collateral to the debt is not there in some circumstances.  So don’t think that there is a fair market for your equipment when there really isn’t much of a market to begin with.

Use caution and think it through when evaluating your overall debt situation.  The primary key for any owner is to evaluate their long term debt against the existing collateral and the equity position in the company.  As long as you stay within a comfortable zone for debt and make improvements from year to year with the debt, then in general you are in good shape.

Notes Related to Long Term Debt

In accounting, we like to add notes to our work.  Well, you should do this too related to your financial reports.  For long term liabilities, notes should include some language related to the original face value, the corresponding interest rate and the remaining balance and the associated current portion.  The following note would represent the truck example stated above at the end of Year 3.

Notes Related to Long Term Liabilities:

On January 1, 201X, a bank note with Small Towne Bank was signed for the purchase of a 201X Pickup Truck.  The face value of the note was $10,000 with amortization over five years at a 6% interest rate.  The following is a schedule related to the note:

Small Towne Bank Truck Note
Current Balance                        $4,362
Current Portion                           2,116
Net Long-Term Balance             $2,246

You could add more columns for other vehicle notes for this group to match up with the total vehicle financing section of the long term liabilities section of the balance sheet.  You can do the same thing for the other line items with breakouts.

Finally another note to long term liabilities is a schedule that breaks out the amount of principle that is currently due (current portion of long term debt), due in the following year and then in years 3 through 5.  Then the dollar value for years 6 – 10 and a final line item amount for any amount greater than 10 years.  The following is an example:

Aggregated Principle Amounts Due over the Remaining Life of the Financial Instruments:

Due in the Next Year                          $ZZ,ZZZ  (will match current portion of long term debt)
Due in the Following Year                    ZZ,ZZZ
Due in Years 3 – 5                             ZZZ,ZZZ
Due in Years 6 – 10                           ZZZ,ZZZ
Due in More Than 10 Years                  ZZ,ZZZ
Total Amount Due                            $ZZZ,ZZZ

This schedule is beneficial in helping the owner to understand the overall cash needed to pay principle as it is due in the future.  This cash must come from either earnings, sale of equity via stock, or other borrowings of money whether short term or long term.

By using notes such as these illustrated above, the owner can refer to them for help in evaluating his overall situation related to long term debt.


Long term debt is one of the many tools available to finance a business operation.  For accounting purposes, long term debt is divided into two primary components, that which is due in the upcoming year (current portion of long term liabilities) and the remaining portion.  Long-term liabilities are grouped together in the Liabilities section of the balance sheet and can be organized in several different presentation formats.  For the small business owner, use the asset matching format as it provides more flexibility in understanding the relationships of the debt to the corresponding assets purchased with that financial instrument.  Use notes to assist you in evaluating your debt, notes should include schedules that break out the respective notes via the respective groups and a final note related to the actual payout of principle in incremental periods.  If properly presented, an owner can easily evaluate their financial status related to long term liabilities.  Act on Knowledge.

If you have any comments or questions, e-mail me at dave (insert the usual ‘at’ symbol)  I would love to hear from you.   If interested in my help as an accountant or consultant, contact me through the ‘My Services’ page in the footer.

If you found this article helpful, please consider a donation to the site.  The donation button is just to the right.  Even if you don’t make a contribution, I encourage you to read more articles on the website to help you become a better business entrepreneur.

About David J Hoare (387 Articles)
I spent 12 Years as a Certified Public Accountant, Over 20 Years of Practice in Accounting and Consulting, Controller in Management of Closely Held Operations, Masters of Science in Accounting, Prepared over 1,000 Business Tax Returns and Hundreds of Individual Returns