What is the Difference Between Short Term and Long Term debt?
What is the difference between Short Term and Long Term debt? Why do I see my loans on the balance sheet twice?
First, let us answer the question of the difference between short term and long term debt. The obvious answer of length of time provides most of the information needed, but we will take a little deeper look at the difference. Short term debt is any debt that is payable within one year. Short-term debt shows up in the current liability section of the balance sheet. Long-term debt is debt that is payable in a time period of greater than one year. Long-term debt shows up in the long-term liabilities section of the balance sheet.
An example of short-term debt would include a line of credit payable within a year. One example of a long-term liability would be a five-year loan on a vehicle. The next twelve months of principal payments on the five-year vehicle loan would be included in current liabilities, while the remaining 48 months of principal would be included in long-term liability. So, that is why the same loan can show up on the balance sheet twice. The balance in the current liability section is the amount due within the next twelve months and the balance in the long-term liability section is the amount due in greater than twelve months. These two amounts added together would be the total balance of the debt.
The more detailed technical accounting answer will point out that the short-term liability and the long-term liability should change after every month (assuming payments are being made). The short term liability balance should include the principal only portion of the next twelve months of payments. The long-term liability would then include the remaining balance of the loan.
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