What is Current Portion of Long-Term Debt?

//What is Current Portion of Long-Term Debt?
What is Current Portion of Long-Term Debt? 2017-10-02T08:13:11+00:00

Definition: The current portion of long-term debt is the amount of noncurrent liabilities that will become due within one year or the current accounting period, whichever is longer. In other words, it’s the amount of long-term liabilities that must be repaid in the current year.

What Does Current Portion of Debt Mean?

A long-term liability is a loan that will not be fully repaid in the current period. Take a bank loan or mortgage for example. These loans typically have 15 or 30 year terms, so the borrower won’t actually pay off the entire balance and retire the loan in the current period. It will take 15 to 30 years to pay off.

Even though the loan isn’t paid off for many years, it still has a portion of the note that must be repaid each year. This is the current portion of the long-term debt– the amount of principle that must be repaid in the current year.

Example

Going back to our bank loan example, let’s assume a company has a $100,000 10-year bank loan for a building project. Each month the company makes a $500 payment and records the principle portion of the payment and the interest portion. For simplicity sake, let’s just assume each $500 dollar payment consists of a $300 principle payment and a $200 interest payment.

The current portion of this debt is $3,600 ($300 monthly principle payment times 12 months). This is the amount of principle that will become due in the current period or within the next year.

Current and long-term liabilities are always presented separately on the balance sheet, so external users can see what obligations the company will need to repay in the next 12 months. Both investors and creditors analyze the liquidity of the company and focus on the amount of current assets required to meet the current obligations.

That’s why the current portion of long-term debt is presented with the other current liabilities on the balance sheet. Technically, the entire loan is long-term in nature, but this portion of it is considered short-term debt.