What Is the Current Portion of Long-Term Debt?
The current portion of long-term debt (CPLTD) refers to the section of a company's balance sheet that records the total amount of long-term debt that must be paid within the current year. For example, if a company owes a total of $100,000, and $20,000 of it is due and must be paid off in the current year, it records $80,000 as long-term debt and $20,000 as CPLTD.
Key Takeaways
- The current portion of long-term debt (CPLTD) is the portion of a long-term liability that is coming due within the next twelve months.
- The CPLTD is separated out on the company's balance sheet because it needs to be paid by highly liquid assets, such as cash.
- The CPLTD is an important tool for creditors and investors to use to identify if a company has the ability to pay off its short-term obligations as they come due.
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Current Portion of Long-Term Debt Explained
When reading a company's balance sheet, creditors and investors use the current portion of long-term debt (CPLTD) figure to determine if a company has sufficient liquidity to pay off its short-term obligations. Interested parties compare this amount to the company's current cash and cash equivalents to measure whether the company is actually able to make its payments as they come due. A company with a high amount in its CPLTD and a relatively small cash position has a higher risk of default, or not paying back its debts on time. As a result, lenders may decide not to offer the company more credit, and investors may sell their shares.
Current Debt vs. Long-Term Debt
Businesses classify their debts, also known as liabilities, as current or long term. Current liabilities are those a company incurs and pays within the current year, such as rent payments, outstanding invoices to vendors, payroll costs, utility bills, and other operating expenses. Long-term liabilities include loans or other financial obligations that have a repayment schedule lasting over a year. Eventually, as the payments on long-term debts come due within the next one-year time frame, these debts become current debts, and the company records them as the CPLTD.
Special Considerations
If a business wants to keep its debts classified as long term, it can roll forward its debts into loans with balloon payments or instruments with later maturity dates. For example, assume a company has a long-term debt of $100,000. Its CPLTD is projected to be $10,000 for the next year. However, to avoid recording this amount as a current liability on its balance sheet, the business can take out a loan with a lower interest rate and a balloon payment due in two years. As a result, its CPLTD will not increase.
In other cases, long-term debts may automatically convert to CPLTD. For example, if a company breaks a covenant on its loan, the lender may reserve the right to call the entire loan due. In this case, the amount due automatically converts from long-term debt to CPLTD.
Recording the CPLTD
To illustrate how businesses record long-term debts, imagine a business takes out a $100,000 loan, payable over a five-year period. It records a $100,000 credit under the accounts payable portion of its long-term debts, and it makes a $100,000 debit to cash to balance the books. At the beginning of each tax year, the company moves the portion of the loan due that year to the current liabilities section of the company's balance sheet.
For example, if the company has to pay $20,000 in payments for the year, the long-term debt amount decreases, and the CPLTD amount increases on the balance sheet for that amount. As the company pays down the debt each month, it decreases CPLTD with a debit and decreases cash with a credit.
