Definition of short-term debt
What is short term debt?
Short-term debt, also known as current liabilities, are the financial obligations of a company that should be repaid within one year. It is listed in the current liabilities part of the total liabilities of the company balance sheet.
VIDEO: What is short-term debt?
Understanding short-term debt
There are generally two types of debt, or debt, that a business accumulates: financing and operating. The former is the result of actions taken to raise funds to grow the business, while the latter is the by-product of obligations arising from normal business operations.
Financing debt is normally considered to be long-term debt in that it has a maturity date greater than 12 months and is generally entered after the current liabilities part in the total liabilities section of the balance sheet.
Operating debt arises from the primary activities necessary to run a business, such as accounts payable, and is expected to be settled within 12 months, or in the current operating cycle, of its accrual accounting. This is known as short term debt and usually consists of short term loans taken out, or commercial paper issued by a company
The value of the short term debt account is very important in determining the performance of a business. Simply put, the higher the rate of endettement, the more the liquidity of the company is concerned. If the account is larger than that of the company Cash and cash equivalents, this suggests that the company may be in bad shape financial health and does not have enough money to pay off its impending obligations.
Liquidity ratio = (current assets – stocks) / current liabilities
Key points to remember
- Short-term debt, also known as current liabilities, is a financial obligation of a business that is expected to be repaid within one year.
- Common types of short-term debt include short-term bank loans, accounts payable, salaries, lease payments, and income taxes payable.
- The most common measure of short-term liquidity is the quick ratio which is an integral part of determining a business’s credit rating.
Types of short-term debt
The first, and often the most common, type of short-term debt is corporate debt. short term bank loans. These types of loans show up on a business’s balance sheet when the business needs quick financing to finance. working capital needs. It is also known as a “bank take” because a short term loan is often used for fill a gap between longer financing options.
Another common type of short-term debt is a company’s accounts payable. This liability account is used to track all unpaid payments owed to external suppliers and stakeholders. If a business buys a machine for $ 10,000 on short-term credit, payable within 30 days, the $ 10,000 is classified as accounts payable.
Commercial paper is an unsecured short-term debt instrument issued by a company, typically for financing accounts receivable, inventory, and meeting short-term liabilities such as payroll. Maturities on commercial paper are rarely more than 270 days. Commercial paper is generally issued at a discount to the nominal value and reflects prevailing market interest rates, and is useful as these liabilities do not need to be registered with the SECOND.
Sometimes, depending on how employers pay their employees, wages and salaries can be viewed as short-term debt. If, for example, an employee is paid on the 15th of the month for work done in the previous period, this would create a short-term debt account for wages owed, until they are paid on the 15th.
Lease payments can also sometimes be recorded as short-term debt. Most leases are considered long-term debt, but some leases should be repaid within a year. If a business, for example, signs a six-month lease on office space, that would be considered short-term debt.
Finally, taxes are sometimes categorized as short-term debt. If a business owes quarterly taxes that have not yet been paid, it could be considered a current liability and be classified as current debt.